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Please choose ONE answer for each question.

1. A coupon bond that pays interest annually has a par value of $1,000, matures in 4 years, and has a
yield to maturity of 10%. What is the value of the bond today if the coupon rate is 8%?
A) $924.18. B) $936.60. C) $968.30.

2. A 12-year, $1,000 face value zero-coupon bond is priced to yield a return of 7.50% compounded
semi-annually. What is the bond’s price?
A) $250.00. B) $413.32. C) $419.85.

3. A 2-year bond (par value of $10,000) has an annual coupon of 15%. An investor determines that
the spot rate of year 1 is 16% and the year 2 spot rate is 17%. Using the arbitrage-free valuation
approach, the bond price is closest to:
A) $9,694. B) $9,541. C) $9,850

4. Betsy Minor is considering the diversification benefits of a two stock portfolio. The expected
return of stock A is 14 percent with a standard deviation of 18 percent and the expected return of
stock B is 18 percent with a standard deviation of 24 percent. Minor intends to invest 40 percent
of her money in stock A, and 60 percent in stock B. The correlation coefficient between the two
stocks is 0.6. What is the variance and standard deviation of the two stock portfolio?
A) Variance = 0.03836; Standard Deviation = 19.59%.
B) Variance = 0.02206; Standard Deviation = 14.85%.
C) Variance = 0.04666; Standard Deviation = 21.60%.

5. A portfolio currently holds Randy Co. and the portfolio manager is thinking of adding either XYZ
Co. or Branton Co. to the portfolio. All three stocks offer the same expected return and total risk.
The covariance of returns between Randy Co. and XYZ is +0.5 and the covariance between Randy
Co. and Branton Co. is -0.5. The portfolio's risk would decrease:
A) more if she bought Branton Co.
B) most if she put half your money in XYZ Co. and half in Branton Co.
C) more if she bought XYZ Co.

6. An investor is evaluating the following possible portfolios. Which of the following portfolios
would LEAST likely lie on the efficient frontier?
Portfolio Expected Return Standard Deviation Portfolio Expected Return Standard Deviation
A 26% 28% D 18% 14%
B 23% 34% E 11% 8%
C 14% 23% F 18% 16%
A) C, D, and E. B) B, C, and F. C) A, B, and C.

7. Given a beta of 1.10 and a risk-free rate of 5%, what is the expected rate of return assuming a 10%
market return?
A) 10.5%. B) 15.5%. C) 5.5%.

8. The following information is available for the stock of Park Street Holdings:
 The price today (P0) equals $45.00. The expected price in one year (P1) is $55.00.
 The stock's beta is 2.31. The firm typically pays no dividend.
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 The 3-month Treasury bill is yielding 4.25%. The historical average S&P 500 return is 12.5%.
Park Street Holdings stock is:
A) undervalued by 3.7%. C) undervalued by 1.1%.
B) overvalued by 1.1%.

9. The stock is currently trading at $31.00 per share. Estimated growth rate for the next three years is
25%. Beginning in the year 4, the growth rate is expected to decline and stabilize at 8%. The
required return for this type of company is estimated at 15%. The dividend in year 1 is estimated
at $2.00. The stock is undervalued by approximately:
A) $15.70. B) $6.40. C) $2.10.

10. An analyst has developed the following data for two companies, PNS Manufacturing (PNS) and
InCharge Travel (InCharge). PNS has an expected return of 15% and a standard deviation of 18%.
InCharge has an expected return of 11% and a standard deviation of 17%. PNS’s correlation with
the market is 75%, while InCharge’s correlation with the market is 85%. If the market standard
deviation is 22%, which of the following are the betas for PNS and InCharge?
Beta of PNS Beta of InCharge
A) 0.66 0.61
B) 0.92 1.10
C) 0.61 0.66

11. The stock is currently trading at $31.00 per share. Estimated growth rate for the next three years is
25%. Beginning in the year 4, the growth rate is expected to decline and stabilize at 8%. The
required return for this type of company is estimated at 15%. The dividend in year 1 is estimated
at $2.00. The stock is undervalued by approximately:
A) $15.70. B) $6.40. C) $2.10.

12. A preferred stock’s dividend is $5 and the firm’s bonds currently yield 6.25%. The preferred
shares are priced to yield 0.75% below the bond yield. The price of the preferred is closest to:
A) $5.00. B) $80.00. C) $90.91.

13. A company last paid a $1.00 dividend, the current market price of the stock is $20 per share and
the dividends are expected to grow at 5 percent forever. What is the required rate of return on the
stock?
A) 10.25%. B) 10.00%. C) 9.78%.

14. The expected dividend one year from today is $2.50 for a share of stock priced at $22.50. The
long-term growth in dividends is projected at 8%. The cost of common equity is closest to:
A) 19.1%. B) 15.6%. C) 18.0%.

15. A company is planning a $50 million expansion. The expansion is to be financed by selling $20
million in new debt and $30 million in new common stock. The before-tax required return on debt
is 9% and the required return for equity is 14%. If the company is in the 40% tax bracket, the
marginal weighted average cost of capital is closest to:
A) 9.0%. B) 10.6%. C) 10.0%
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16. Hatch Corporation's target capital structure is 40% debt, 50% common stock, and 10% preferred
stock. Information regarding the company's cost of capital can be summarized as follows:
 The company's bonds have a nominal yield to maturity of 7%.
 The company's preferred stock sells for $40 a share and pays an annual dividend of $4 a share.
 The company's common stock sells for $25 a share and is expected to pay a dividend of $2 a
share at the end of the year (i.e., D1 = $2.00). The dividend is expected to grow at a constant
rate of 7% a year. The company has no retained earnings. The company's tax rate is 40%.
What is the company's weighted average cost of capital (WACC)?
A) 10.18%. B) 10.59%. C) 10.03%.

17. A company is considering a $10,000 project that will last 3 years. Annual after tax cash flows are
expected to be $5,000. Target debt/equity ratio is 2/3. Cost of equity is 12%. Cost of debt is 6%.
Tax rate 25%. What is the project's net present value (NPV)?
A) $3,003. B) $2,660. C) $1,391

18. Agora Systems Inc. has the following capital structure and cost of new capital:
Book Value Market Value Cost of Issuing
Debt $50 million $58 million 5.3%
Preferred stock $25 million $28 million 7.2%
Common stock $200 million $525 million 8.0%
Total capital $275 million $611 million
What is Agora’s weighted-average cost of capital if its marginal tax rate is 40%?
A) 6.23%. B) 8.37%. C) 7.50%.

19. Lane Industries has a project with the following cash flows:
Year 0 1 2 3 4 5
Cash Flow −$200,000 60,000 80,000 70,000 60,000 50,000
The project's cost of capital is 12%. The discounted payback period is closest to:
A) 2.9 years. B) 3.9 years. C) 3.5 years.

20. A company is considering the purchase of a copier that costs $5,000. Assume a cost of capital of
10 percent and the following cash flow schedule:
Year 1: $3,000 Year 2: $2,000 Year 3: $2,000
Determine the project's NPV.
A) $243 B) $883 C) $507

21. Which of the following projects would most likely have multiple internal rates of return (IRRs)?
The cost of capital for all projects is 10.0%.

Cash Flows South East West

A) Project South only. C) Projects South and West.

22. St. John’s Paper is considering purchasing equipment today that has a depreciable cost of $1
million. The equipment will be depreciated 4-year straight line basis. Assume that the company
sells the equipment after three years for $400,000 and the company’s tax rate is 40 percent. What
would be the tax consequences resulting from the sale of the equipment?
A) The company would have to pay $60,000 in taxes.
B) The company would receive a tax credit of $60,000.
C) The company would have to pay $80,000.

23. Ellison Products is considering a new project that develops a new laundry detergent, WOW. The
company has estimated that the project’s NPV is $3 million, but this does not consider that the
new laundry detergent will reduce the revenues received on its existing laundry detergent
products. Specifically, the company estimates that if it develops WOW the company will lose
$500,000 in after-tax cash flows during each of the next 3 years because of the cannibalization of
its existing products. Ellison’s WACC is 10 percent. What is the net present value (NPV) of
undertaking WOW after considering externalities?
A) $1,756,580 B) $3,000,000 C) $1,243,420

24. An analyst wants to determine whether Dover Holdings is overvalued or undervalued, and by how
much (expressed as percentage return). The analyst gathers the following information on the
stock:
 Market standard deviation = 0.70  Expected annual dividend = $1.50
 Covariance of Dover with market = 0.85  3-month Treasury bill yield = 4.50%.
 Dover’s current stock price = $35.00  Historical average S&P 500 return =
 The expected price in one year (P1) is $39 12.0%.
Dover Holdings stock is:
A) undervalued by approximately 2.1%.
B) undervalued by approximately 1.8%.
C) overvalued by approximately 1.8%.