1. Investors require a 4 percent return on risk-free investments. On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?
A. Inflation premium
B. Required return
C. Real return
D. Average return
E. Risk premium
2. An efficient capital market is best defined as a market in which security prices reflect which one of the following?
A. Current inflation
B. A risk premium
C. Available information
D. The historical arithmetic rate of return
E. The historical geometric rate of return
3. Over the period of 1926-2008
A. long-term government bonds underperformed long-term corporate bonds.
B. small-company stocks underperformed large-company stocks.
C. inflation exceeded the rate of return on U.S. Treasury bills.
D. U.S. Treasury bills outperformed long-term government bonds.
E. large-company stocks outperformed all other investment categories.
4. Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess profits on ABC stock based on the knowledge he has related to his experiments if the financial markets are:
A. weak form efficient.
B. strong form efficient.
C. semistrong form efficient.
D. efficient at any level.
E. aware that the trader is an insider
5. One year ago, Steven purchased 4,200 shares of KNF stock for $177,072. Today, he sold those shares for $48.10 a share. What is the capital gains yield on this investment if the dividend yield is 3.3 percent?
A. 10.79 percent
B. 11.23 percent
C. 12.29 percent
D. 14.09 percent
E. 14.53 percent
6. Standard deviation measures _____ risk while beta measures _____ risk
A. systematic; unsystematic
B. unsystematic; systematic
C. total; unsystematic
D. total; systematic
E. asset-specific; market
7. Which one of the following portfolios will have a beta of zero?
A. A portfolio that is equally as risky as the overall market.
B. A portfolio that consists of a single stock.
C. A portfolio comprised solely of U. S. Treasury bills.
D. A portfolio with a zero variance of returns.
E. No portfolio can have a beta of zero.
8. The beta of a risky portfolio cannot be less than _____ nor greater than _____.
A. 0; 1
B. 1; the market beta
C. the lowest individual beta in the portfolio; market beta
D. the market beta; the highest individual beta in the portfolio
E. the lowest individual beta in the portfolio; the highest individual beta in the portfolio
9. You want to create a $48,000 portfolio that consists of three stocks and has an expected return of 14.5
A. 13.67 percent
B. 14.14 percent
C. 15.38 percent
D. 15.87 percent
E. 16.11 percent
10. A stock has a beta of 1.37 and an expected return of 16.6 percent. The risk-free rate is 4.8 percent. What is the slope of the security market line?
A. 6.49 percent
B. 7.28 percent
C. 8.61 percent
D. 9.23 percent
E. 9.99 percent
11. The risk-free rate is 4.2 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.2 and an expected return of 13.1 percent. Stock B has a beta of 0.87 and an expected return of 11.4 percent. Are these stocks correctly priced? Why or why not?
A. No; Stock A is underpriced and stock B is overpriced.
B. No; Stock A is overpriced and stock B is underpriced.
C. No; Stock A is overpriced but stock B is correctly priced.
D. No; Stock A is underpriced but stock B is correctly priced.
E. Yes; Both stocks are correctly priced.
12. You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.04 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?
13. Ted is trying to decide what cost of capital he should assign to a project. Which one of the following should be his primary consideration in this decision?
A. Amount of debt used to finance the project
B. Use, or lack thereof, of preferred stock to finance the project
C. Mix of funds used to finance the project
D. Risk level of the project
E. Length of the project's life
14. Which of the following will increase the cost of equity for a firm with a beta of 1.1?
I. decrease in the security's beta
II. decrease in the market risk premium
III. decrease in the risk-free rate
IV. increase in the risk-free rate
A. II only
B. III only
C. I and II only
D. II and III only
E. I and IV only
15. Which one of the following will increase the cost of equity, all else held constant?
A. Increase in the dividend growth rate
B. Decrease in beta
C. Decrease in future dividends
D. Increase in stock price
E. Decrease in market risk premium
16. A firm has a cost of equity of 13 percent, a cost of preferred of 11 percent, and an aftertax cost of debt of 6 percent. Given this, which one of the following will increase the firm's weighted average cost of capital?
A. Increasing the firm's tax rate
B. Issuing new bonds at par
C. Redeeming shares of common stock
D. Increasing the firm's beta
E. Increasing the debt-equity ratio
17. The common stock of Yanderloft and Sons has a beta that is 25 percent larger than the overall market beta. Currently, the market risk premium is 9.2 percent while the U.S. Treasury bill is yielding 4.7 percent. What is the cost of equity for this firm?
A. 13.76 percent
B. 14.96 percent
C. 15.80 percent
D. 16.20 percent
E. 17.85 percent
18. Beverly's is a retail chain selling the latest fashions through its outlets located in various neighborhood malls. Clothing Galore is a wholesaler that buys from textile mills and sells to retail outlets. Beverly's has a cost of capital of 13.6 percent, while Clothing Galore's cost of capital is 17.8 percent. Both firms are considering opening a retail outlet in a gigantic new mall. Both proposals are quite similar in design and have basically the following financial features: an initial cash outlay of $2.7 million, a projected 5-year life with no salvage value, and cash inflows of $845,000 a year for the life of the project. Which firm or firms, if either, should open a retail outlet in the new mall?
A. Beverly's only
B. Clothing Galore only
C. Both Beverly's and Clothing Galore
D. Neither Beverly's nor Clothing Galore
E. The answer cannot be determined based on the information provided
19. Which one of the following terms applies to the costs incurred by a firm which is trying to avoid filing for bankruptcy?
A. Indirect bankruptcy costs
B. Direct bankruptcy costs
C. Static theory cost
D. Optimal capital structure cost
E. Reorganization costs
20. Which one of the following represents the present value of the interest tax shield?
A. D (1 - Tc)
B. D/(1 - Tc)
D. D - D(Tc)
E. TC D
21. Which of the following will increase the value of a levered firm according to M&M Proposition I, with taxes?
I. decrease in the amount of the debt
II. increase in the value of the unlevered firm
III. decrease in the tax rate
IV. increase in the interest rate on the debt
A. II only
B. I and IV only
C. II and III only
D. II and IV only
E. II, III, and IV only
22. Which one of the following statements related to the static theory of capital structure is correct?
A. A firm begins to lose value as soon as the first dollar of debt is incurred.
B. The actual value of a firm continually rises in direct proportion to the increased use of debt.
C. The linear function of a firm's value has a constant positive slope.
D. A firm's value is maximized when a firm operates at its optimal debt level.
E. The value of a firm will automatically decrease whenever the debt-equity ratio is decreased.
23. Coaster's has a cost of equity of 15.4 percent, a return on assets of 10.2 percent, and a cost of debt of 7.3 percent. There are no taxes. What is the firm's weighted average cost of capital?
A. 7.30 percent
B. 10.20 percent
C. 10.97 percent
D. 15.40 percent
E. Cannot be determined from the information provided
24. On which one of the following dates is the determination made as to which shareholders will receive a dividend payment?
A. Date of record
B. Ex-dividend date
C. Payment date
D. Declaration date
E. Public announcement date
25. Which one of the following statements is correct?
A. Dividends are irrelevant.
B. Flotation costs are a good reason to support a high dividend payout.
C. Current tax laws favor high current dividends for individual investors.
D. Dividend policy is the time pattern of dividend payout.
E. Corporate investors tend to prefer low dividend payouts on securities they own
26. Which one of the following will result from a stock repurchase?
A. Increase in the number of shares outstanding
B. Decrease in the earnings per share
C. Decrease in the market price per share
D. Increase in the market value of equity per share
E. Decrease in the P/E ratio
27. Research conducted on firms' dividend policies over time support which one of the following conclusions?
A. Aggregate dividends and stock repurchases have steadily declined in real terms.
B. Dividends are currently paid by the vast majority of firms.
C. Managers tend to smooth dividends.
D. Stock prices tend to increase whenever anticipated changes in dividends occur.
E. Firms commence paying dividends prior to doing any stock repurchases.
28. Keyser Trucking just paid its annual regular cash dividend of $1.22 a share, along with a special dividend of $0.25 a share. The company follows a policy of increasing its dividend by 2 percent annually. Which one of the following is the best estimate of the firm's next annual dividend payment?
29. Global Traders has common stock outstanding at a market price of $53 per share. The total market value of the firm is $6,603,800. The firm plans on liquidating one of its divisions for $548,000 in cash and distributing the proceeds to the shareholders in the form of a liquidating dividend. What will be the amount per share of that dividend?
30. Zacariah's Nursery has 6,000 shares of stock outstanding at a market price of $20 a share. The earnings per share are $1.54. The firm has total assets of $315,000 and total liabilities of $186,000. Today, the firm is paying an annual cash dividend of $0.80 a share. Ignore taxes. What will the earnings per share be after the dividend is paid?
31. Which one of the following terms is defined as an underwriting for which the underwriters assume full responsibility for any unsold shares?
A. Initial public offering
B. Best efforts underwriting
C. Firm commitment underwriting
D. Rights offer
E. Private placement
32. Which of the following are true statements?
I. Venture capitalists tend to be long-term investors in a firm.
II. Venture capital is relatively easy to obtain for most new firms.
III. Venture capitalists generally have an exit strategy.
IV. Venture capitalists tend to specialize in one type of financing for a select type of firm.
A. I and II only
B. III and IV only
C. I and III only
D. I and IV only
E. II and IV only
33. Which one of the following is an aftermarket function performed by the underwriters of a securities issue?
A. Distributing the registration statements
B. Distributing the red herrings
C. Filing a letter of comment with the SEC
D. Exercising the Green Shoe option
E. Setting the market price
34. Hilltop Market is offering 60,000 shares of stock to the public in a general cash offer. The offer price is $30 a share and the underwriter's spread is 8 percent. The administrative costs are estimated at $310,000. How much will Hilltop Market receive from this stock offering assuming the issue is completely sold?