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Student: ___________________________________________________________________________

1. Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four

years. His car payments can be described by which one of the following terms?

A. Perpetuity

B. Annuity

C. Consol

D. Lump sum

E. Factor

2. Which one of the following is the annuity present value formula?

A. C {{1 - [1/(1 + r)

t

]}/r}

B. C {1 - [1/(1 + r)

t

]} - r

C. C {1 - [r/(1 + r)

t

]}/r

D. C {{1 - [1/(1 r)

t

]} r}

E. C {1 - [r/(1 r)

t

]} r

3. Eric is considering an investment that will pay $5,000 a year for seven years, starting one year from today.

How much should she pay for this investment if she wishes to earn a 13 percent rate of return?

A. $17,899.08

B. $18,023.88

C. $20,186.75

D. $22,113.05

E. $23,749.24

4. How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw

$25,000 a year for 30 years? She expects to earn an average rate of return of 13 percent.

A. $176,800.16

B. $180,419.81

C. $181,533.33

D. $185,160.98

E. $187,391.34

1

5. Karl can afford car payments of $235 a month for 48 months. The bank will lend him money to buy a car at

7.75 percent interest. How much money can he afford to borrow?

A. $9,672.48

B. $9,734.95

C. $9,899.60

D. $10,022.15

E. $10,422.09

6. When you refer to a bond's coupon, you are referring to which one of the following?

A. Difference between the purchase price and the face value

B. Annual interest divided by the current bond price

C. Difference between the bid and ask price

D. Annual interest payment

E. Principal amount of the bond

7. What is the principal amount of a bond that is repaid at the end of the loan term called?

A. Coupon

B. Market price

C. Accrued price

D. Dirty price

E. Face value

8. On which one of the following dates is the principal amount of a bond repaid?

A. Coupon date

B. Issue date

C. Discount date

D. Maturity date

E. Face date

9. Which one of the following terms refers to a bond's rate of return that is required by the marketplace?

A. Coupon rate

B. Yield to maturity

C. Dirty yield

D. Call yield

E. Discount rate

2

10. The written agreement that contains the specific details related to a bond issue is called the bond:

A. indenture.

B. debenture.

C. document.

D. registration statement.

E. issue paper.

11. A call provision grants the bond issuer the:

A. right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds.

B. option to exchange the bonds for equity securities.

C. right to automatically extend the bond's maturity date.

D. right to repurchase the bonds on the open market prior to maturity.

E. option of repurchasing the bonds prior to maturity at a prespecified price.

12. When a bond's yield to maturity is less than the bond's coupon rate, the bond:

A. had to be recently issued.

B. is selling at a premium.

C. has reached its maturity date.

D. is priced at par.

E. is selling at a discount.

13. The yield to maturity on a discount bond is:

A. equal to both the coupon rate and the current yield.

B. equal to the current yield but greater than the coupon rate.

C. greater than both the current yield and the coupon rate.

D. less than the current yield but greater than the coupon rate.

E. less than both the current yield and the coupon rate.

14. What is the price of a $1,000 face value bond if the quoted price is 102.1?

A. $102.10

B. $1,002.10

C. $1,020.01

D. $1,020.10

E. $1,021.00

3

15. A bond has a $1,000 face value, a market price of $1,045, and pays interest payments of $80 every year.

What is the coupon rate?

A. 6.76 percent

B. 7.00 percent

C. 7.12 percent

D. 8.00 percent

E. 8.14 percent

16. A 5.5 percent $1,000 bond matures in seven years, pays interest semiannually, and has a yield to maturity of

6.23 percent. What is the current market price of the bond?

A. $945.08

B. $947.21

C. $959.09

D. $959.60

E. $962.40

17. A $1,000 face value bond currently has a yield to maturity of 6.69 percent. The bond matures in three years

and pays interest annually. The coupon rate is 7 percent. What is the current price of this bond?

A. $948.01

B. $949.60

C. $1,005.26

D. $1,008.18

E. $1,010.13

18. Red Mountain, Inc. bonds have a face value of $1,000. The bonds carry a 7 percent coupon, pay interest

semiannually, and mature in 13.5 years. What is the current price of these bonds if the yield to maturity is 6.82

percent?

A. $989.50

B. $994.56

C. $1,015.72

D. $1,018.27

E. $1,020.00

4

19. A six-year, semiannual coupon bond is selling for $991.38. The bond has a face value of $1,000 and a yield

to maturity of 9.19 percent. What is the coupon rate?

A. 4.50 percent

B. 4.60 percent

C. 6.00 percent

D. 9.00 percent

E. 9.19 percent

20. One year ago, you purchased a 7.5 percent annual coupon bond for a clean price of $980. The bond now has

seven years remaining until maturity. Today, the yield to maturity on this bond is 6.87 percent. How does

today's clean price of this bond compare to your purchase price?

A. 4.24 percent lower

B. 4.70 percent lower

C. 5.48 percent lower

D. 5.52 percent higher

E. 6.61 percent higher

21. What is the name given to the model that computes the present value of a stock by dividing next year's

annual dividend amount by the difference between the discount rate and the rate of change in the annual

dividend amount?

A. Stock pricing model

B. Equity pricing model

C. Capital gain model

D. Dividend growth model

E. Present value model

22. The dividend yield is defined as:

A. the current annual cash dividend divided by the current market price per share.

B. the current annual cash dividend divided by the current book value per share.

C. next year's expected cash dividend divided by the current market price per share.

D. next year's expected cash dividend divided by the current book value per share.

E. next year's expected cash dividend divided by next year's expected market price per share.

23. Which one of the following types of securities has no priority in a bankruptcy proceeding?

A. Convertible bond

B. Senior debt

C. Common stock

D. Preferred stock

E. Straight bond

5

24. Dividends are best defined as:

A. cash payments to shareholders.

B. cash payments to either bondholders or shareholders.

C. cash or stock payments to shareholders.

D. cash or stock payments to either bondholders or shareholders.

E. distributions of stock to current shareholders.

25. Which one of the following generally pays a fixed dividend, receives first priority in dividend payment, and

maintains the right to a dividend payment, even if that payment is deferred?

A. Cumulative common

B. Noncumulative common

C. Noncumulative preferred

D. Cumulative preferred

E. Senior common

26. Newly issued securities are sold to investors in which one of the following markets?

A. Proxy

B. Stated value

C. Inside

D. Secondary

E. Primary

27. What is the market called that allows shareholders to resell their shares to other investors?

A. Primary

B. Proxy

C. Secondary

D. Inside

E. Initial

28. The price of a stock at year 4 can be expressed as:

A. D

0

/(R + g

4

).

B. D

0

(1 + R)

5

.

C. D

1

(1 + R)

5

.

D. D

4

/(R - g).

E. D

5

/(R - g).

6

29. Delfino's expects to pay an annual dividend of $1.50 per share next year. What is the anticipated dividend

for year 5 if the firm increases its dividend by 2 percent annually?

A. $1.50 (1.02)

1

B. $1.50 (1.02)

2

C. $1.50 (1.02)

3

D. $1.50 (1.02)

4

E. $1.50 (1.02)

5

30. Reynolds Metals common stock is selling for $25 a share and has a dividend yield of 3.1 percent. What is

the dividend amount?

A. $0.31

B. $0.78

C. $3.49

D. $4.25

E. $7.80

31. The Glass Ceiling paid an annual dividend of $2.20 per share last year. Management just announced that

future dividends will increase by 2.8 percent annually. What is the amount of the expected dividend in year 5?

A. $2.39

B. $2.41

C. $2.46

D. $2.53

E. $2.58

32. The Waffle House pays a constant annual dividend of $1.25 per share. How much are you willing to pay for

one share if you require a 25 percent rate of return?

A. $4.72

B. $5.00

C. $6.52

D. $6.63

E. $6.83

7

33. Shoreline Foods pays a constant annual dividend of $1.60 a share and currently sells for $28.50 a share.

What is the rate of return?

A. 4.56 percent

B. 5.39 percent

C. 5.61 percent

D. 6.63 percent

E. 6.91 percent

34. The common stock of The Garden of Eden is selling for $42 a share. The company pays a constant annual

dividend and has a total return of 5.8 percent. What is the amount of the dividend?

A. $1.02

B. $2.04

C. $2.44

D. $3.70

E. $6.81

35. Healthy Foods just paid its annual dividend of $1.45 a share. The firm recently announced that all future

dividends will be increased by 2.8 percent annually. What is one share of this stock worth to you if you require

a 14 percent rate of return?

A. $12.56

B. $12.95

C. $13.31

D. $13.68

E. $14.07

36. Solar Energy, Inc. will pay an annual dividend of $1.85 next year. The company just announced that future

dividends will be increasing by 2 percent annually. How much are you willing to pay for one share of this stock

if you require a 14 percent return?

A. $15.14

B. $15.42

C. $15.78

D. $16.12

E. $16.62

8

37. Braxton's Cleaning Company stock is selling for $32.60 a share based on a 14 percent rate of return. What is

the amount of the next annual dividend if the dividends are increasing by 5 percent annually?

A. $2.71

B. $2.75

C. $2.78

D. $2.86

E. $2.93

38. The common stock of Up-Towne Movers is selling for $33 a share and has a 10 percent rate of return. The

growth rate of the dividends is 2 percent annually. What is the amount of the next annual dividend?

A. $2.58

B. $2.61

C. $2.64

D. $2.67

E. $2.70

39. Swan Lake Marina is expected to pay an annual dividend of $1.58 next year. The stock is selling for $18.53

a share and has a total return of 12 percent. What is the dividend growth rate?

A. 2.82 percent

B. 3.03 percent

C. 3.28 percent

D. 3.47 percent

E. 3.66 percent

40. Santa Klaus Toys just paid its annual dividend of $1.40. The required return is 8 percent and the dividend

growth rate is 1 percent. What is the expected value of this stock five years from now?

A. $20.82

B. $21.23

C. $22.06

D. $23.45

E. $23.78

41. Discounted cash flow valuation is the process of discounting an investment's:

A. assets.

B. future profits.

C. liabilities.

D. costs.

E. future cash flows.

9

42. The payback period is the length of time it takes an investment to generate sufficient cash flows to enable

the project to:

A. produce a positive annual cash flow.

B. produce a positive cash flow from assets.

C. offset its fixed expenses.

D. offset its total expenses.

E. recoup its initial cost.

43. Which one of the following defines the internal rate of return for a project?

A. Discount rate that creates a zero cash flow from assets

B. Discount rate that results in a zero net present value for the project

C. Discount rate that results in a net present value equal to the project's initial cost

D. Rate of return required by the project's investors

E. The project's current market rate of return

44. Which one of the following indicates that a project is expected to create value for its owners?

A. Profitability index less than 1.0

B. Payback period greater than the requirement

C. Positive net present value

D. Positive average accounting rate of return

E. Internal rate of return that is less than the requirement

45. Which one of the following indicates that a project should be rejected?

A. Average accounting return that exceeds the requirement

B. Payback period that is shorter than the requirement period

C. Positive net present value

D. Profitability index less than 1.0

E. Internal rate of return that exceeds the required return

10

46. What is the net present value of a project with the following cash flows if the discount rate is 15 percent?

A. $39.80

B. $42.97

C. $44.16

D. $48.21

E. $48.30

47. What is the net present value of a project with the following cash flows if the discount rate is 15 percent?

A. -$8,406.11

B. -$5,433.67

C. -$3,089.16

D. $1,407.92

E. $5,433.67

48. What is the net present value of a project that has an initial cost of $40,000 and produces cash inflows of

$8,000 a year for 11 years if the discount rate is 15 percent?

A. $798.48

B. $1,240.23

C. $1,869.69

D. $2,111.41

E. $2,470.01

11

49. The Greasy Spoon Restaurant is considering a project with an initial cost of $525,000. The project will not

produce any cash flows for the first three years. Starting in year 4, the project will produce cash inflows of

$721,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 16 percent.

What is the project's net present value?

A. $417,294.85

B. $424,591.11

C. $451,786.86

D. $492,255.56

E. $512,408.23

50. Empire Industries is considering adding a new product to its lineup. This product is expected to generate

sales for four years after which time the product will be discontinued. What is the project's net present value if

the firm wants to earn a 13 percent rate of return?

A. $3,505.52

B. $3,767.24

C. $4,312.65

D. $4,519.58

E. $4,902.71

12

51. Empire Industries is considering adding a new product to its lineup. This product is expected to generate

sales for four years after which time the product will be discontinued. What is the project's net present value if

the firm wants to earn a 13 percent rate of return?

A. $3,505.52

B. $3,767.24

C. $4,312.65

D. $4,519.58

E. $4,902.71

52. Professional Properties is considering remodeling the office building it leases to Heartland Insurance. The

remodeling costs are estimated at $3.4 million. If the building is remodeled, Heartland Insurance has agreed to

pay an additional $820,000 a year in rent for the next five years. The discount rate is 15 percent. What is the

benefit of the remodeling project to Professional Properties?

A. -$651,233

B. -$489,072

C. $5,214

D. $128,399

E. $311,417

53. A proposed project requires an initial cash outlay of $849,000 for equipment and an additional cash outlay

of $48,500 in year 1 to cover operating costs. During years 2 through 4, the project will generate cash inflows of

$354,000 a year. What is the net present value of this project at a discount rate of 13 percent? Round your

answer to the nearest whole dollar.

A. -$152,232

B. -$66,391

C. $67,333

D. $128,612

E. $239,602

13

54. The Black Horse is currently considering a project that will produce cash inflows of $12,000 a year for three

years followed by $6,500 in year 4. The cost of the project is $38,000. What is the profitability index if the

discount rate is 7 percent?

A. 0.96

B. 0.99

C. 1.04

D. 1.09

E. 1.12

55. A firm is reviewing a project that has an initial cost of $71,000. The project will produce annual cash

inflows, starting with year 1, of $8,000, $13,400, $18,600, $33,100, and finally in year 5, $37,900. What is the

profitability index if the discount rate is 11 percent?

A. 0.92

B. 0.98

C. 1.02

D. 1.07

E. 1.12

56. A project has expected cash inflows, starting with year 1, of $2,200, $2,900, $3,500, and finally in year 4,

$4,000. The profitability index is 1.14 and the discount rate is 12 percent. What is the initial cost of the project?

A. $7,899.16

B. $8,098.24

C. $8,166.19

D. $9,211.06

E. $9,250.00

57. Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to

as which one of the following?

A. Eroded cash flows

B. Deviated projections

C. Incremental cash flows

D. Directly impacted flows

E. Assumed flows

14

58. A cost that should be ignored when evaluating a project because that cost has already been incurred and

cannot be recouped is referred to as which type of cost?

A. Fixed

B. Forgotten

C. Variable

D. Opportunity

E. Sunk

59. Which one of the following terms refers to the best option that was foregone when a particular investment is

selected?

A. Side effect

B. Erosion

C. Sunk cost

D. Opportunity cost

E. Marginal cost

60. Which one of the following terms is most commonly used to describe the cash flows of a new project that

are simply an offset of reduced cash flows for a current project?

A. Opportunity cost

B. Sunk cost

C. Erosion

D. Replicated flows

E. Pirated flows

15

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