HE3014 ECONOMICS OF CORPORATE FINANCE QUIZ

NAME (as on your student card)

MARKS

No.

10

Choice

1) Which of the following relationship is FALSE for balance sheet?

A) total assets - total liabilities = shareholders equity
B) current assets + fixed assets = current liabilities + long-term liabilities
C) current assets - current liabilities = net working capital
D) long-term liabilities+ shareholders equity = net working capital + fixed assets

2) Which of the following is the goal of a corporation under a well-functioning capital market?
A) maximize sales and profits
B) reconcile current and future consumption for shareholders
C) invest all projects with positive NPV
D) diversify investment projects to reduce risk

3) If the eight-year discount factor is 4/9, what is the future value of $1 at the end of four years?
A) $1.50
B) $1.97
C) $ 0.67
D) $1.14

4) Which of the following statement is FALSE?

A) If a bonds coupon rate is higher than its yield to maturity, the bond will sell for more than face value.
B) If a bonds coupon rate is equal to its yield to maturity, the bond will sell at face value.
C) Other things equal, the lower the bond coupon, the higher its volatility.
D) If interest rates rise, bond durations rise also.

5) Suppose the cost of capital is 12% per year. Ever Green is a mature company fully financed by equity.
It is estimated to have a stable growth rate 2% per year. It has a payout ratio 80%. What would be the
price-earnings ratio for Ever Green?
A) 12
B) 10
C) 8
D) 6

6) Summer Co. is expected to pay a dividend or $4.00 per share out of earnings of $7.50 per share. If the
required rate of return on the stock is 15% and dividends are growing at a current rate of 10% per year,
what is the present value of the growth opportunity for the stock (PVGO)?
A) $80
B) $50
C) $30
D) $26

7) The expected rate of returns for stock A and B are 5% and 25%, respectively. The standard deviations
are 4% and 40%, respectively. The correlation coefficient between their returns is 0.2. Suppose you have
an investment portfolio based on these two stocks. If the portfolio offers a rate of 10%, what is its
standard deviation?
A) 10%
B) 11%
C) 12%
D) 13%

8) Suppose the expected rates return of two stocks A and B are 9% and 15%, respectively. The

corresponding standard deviations are 20% and 40%, respectively. If the returns of A and B were
indeed perfectly negatively correlated, the portfolio strategy that would completely eliminate risk
should have a rate of return of
A) 9%

B) 11%

C) 12%

D) 15%

9) Which of the following statement is FALSE?

A) A stock with a low standard deviation always contributes less to portfolio risk than a stock with a
higher standard deviation.
B) If stocks were perfectly positively correlated, diversification would not reduce risk.
C) If the standard deviation of the market return is 20%, a well-diversified portfolio with a standard
deviation of 15% has a beta of 0.75.
D) If the standard deviation of the market return is 20%, a poorly-diversified portfolio with a standard
deviation of 20% has a beta less than 1.

10) Which of the following statement is TRUE?

A) If a stock lies above the security market line, it must be overvalued.
B) If a stock lies below the security market line, its price is going to increase.
C) The expected return on an investment with a beta of 2.0 is twice as high as the expected return on the
market.
D) Investors demand higher expected rates of return from stocks with returns that are highly exposed to
macroeconomic risks.

THIS IS THE END OF THE QUIZ.