FIN202 Chapter 4 7 8

management, shareholder, and creditor

[CHAPTER 4] 26. Financial statements can be analyzed from the following three different perspectives: A) management, regulator, and bondholder B) management, shareholder, and creditor C) regulator, shareholder, and creditor D) shareholder, creditor, and regulator

All of the above.

27. Shareholders analyze financial statements in order to: A) assess the cash flows that the firm will generate from operations/ B) determine the firm’s profitability, their return for that period, and the dividend they are likely to receive. C) focus on the value of the stock they hold. D) All of the above.

All of the above.

28. The creditors of a firm analyze financial statements so that they can focus on A) the firm’s amount of debt. B) the firm’s ability to generate sufficient cash flows to meet all legal obligations first and still have sufficient cash flows to meet debt repayment and interest payments. C) the firm’s ability to meet its short-term obligations. D) All of the above.

a and b.

29. A firm’s management analyzes financial statement’s so that: A) they can get feedback on their investing, financing, and working capital decisions by identifying trends in the various accounts that are reported in the financial statements. B) similar to shareholders, they can focus on profitability, dividend, capital appreciation, and return on investment. C) they can get more stock options. D) a and b.

All of the above.

30. Anyone analyzing a firm’s financial statements should A) use audited financial statements only. B) do a trend analysis. C) perform a benchmark analysis. D) All of the above.

Use unaudited financial statements.

31. An individual analyzing a firm’s financial statements should do all but one of the following: A) Use unaudited financial statements. B) Do a trend analysis. C) Perform a benchmark analysis. D) Compare the firm’s performance to that of its direct competitors.

Each asset and liability item on the balance sheet is standardized by dividing it by sales.

32. All but one of the following is true of common-size balance sheets. A) Each asset and liability item on the balance sheet is standardized by dividing it by total assets. B) Balance sheet accounts are represented as percentages of total assets. C) Each asset and liability item on the balance sheet is standardized by dividing it by sales. D) Common-size financial statements allow us to make meaningful comparisons between the financial statements of two firms that are different in size.

Each income statement item is standardized by dividing it by total assets.

33. All but one of the following is true of common-size income statements. A) Each income statement item is standardized by dividing it by total assets. B) Income statement accounts are represented as percentages of sales. C) Each income statement item is standardized by dividing it by sales. D) Common-size financial statement analysis is a specialized application of ratio analysis.

All of the above are true.

34. Common-size financial statements: A) are a specialized application of ratio analysis. B) allow us to make meaningful comparisons between the financial statements of two firms that are different in size. C) are prepared by having each financial statement item expressed as a percentage of some base number, such as total assets or total revenues. D) All of the above are true.

All of the above are true.

35. Which of the following is true of ratio analysis? A) A ratio is computed by dividing one balance sheet or income statement by another. B) The choice of the scale determines the story that can be garnered from the ratio. C) Ratios can be calculated based on the type of firm being analyzed or the kind of analysis being performed. D) All of the above are true.

For manufacturing firms, quick ratios will tend to be much larger than current ratios.

36. Which of the following is NOT true of liquidity ratios? A) They measure the ability of the firm to meet short-term obligations with short-term assets without putting the firm in financial trouble. B) There are two commonly used ratios to measure liquidity—current ratio and quick ratio. C) For manufacturing firms, quick ratios will tend to be much larger than current ratios. D) The higher the number, the more liquid the firm and the better its ability to pay its short-term bills.

Service firms that tend not to carry too much inventory will see significantly higher quick ratios than current ratios.

37. All but one of the following is true about quick ratios. A) The quick ratio is calculated by dividing the most liquid of current assets by current liabilities. B) Service firms that tend not to carry too much inventory will see significantly higher quick ratios than current ratios. C) Inventory, being not very liquid, is subtracted from total current assets to determine the most liquid assets. D) Quick ratios will tend to be much smaller than current ratio for manufacturing firms or other industries that have a lot of inventory.

The firm collects on its accounts receivables.

38. Which one of the following does NOT change a firm’s current ratio? A) The firm collects on its accounts receivables. B) The firm purchases inventory by taking a short-term loan. C) The firm pays down its accounts payables. D) None of the above.

an increase in accounts payable

39. All else being equal, which one of the following will decrease a firm’s current ratio? A) a decrease in the net fixed assets B) a decrease in depreciation C) an increase in accounts payable D) None of the above

It is calculated by dividing inventory by cost of goods sold.

40. All but one of the following is true about the inventory turnover ratio. A) It is calculated by dividing inventory by cost of goods sold. B) It measures how many times the inventory is turned over into saleable products. C) The more times a firm can turnover the inventory, the better. D) Too high a turnover or too low a turnover could be a warning sign.

The more days that it takes the firm to collect on its receivables, the more efficient the firm is.

41. Which one of the following statements is NOT true? A) The accounts receivables turnover ratio measures how quickly the firm collects on its credit sales. B) One ratio that measures the efficiency of a firm’s collection policy is days’ sales outstanding. C) The more days that it takes the firm to collect on its receivables, the more efficient the firm is. D) DSO measures in days, the time the firm takes to convert its receivables into cash.

The fixed assets turnover ratio is less significant for equipment-intensive manufacturing industry firms than the total assets turnover ratio.

42. One of the following statements is NOT true of asset turnover ratios. A) Asset turnover ratios measure the level of sales per dollar of assets that the firm has. B) The fixed assets turnover ratio is less significant for equipment-intensive manufacturing industry firms than the total assets turnover ratio. C) The higher the total asset turnover, the more efficiently management is using total assets. D) All of the above are true.

The lower the level of a firm’s debt, the lower the firm’s equity multiplier.

43. Which one of the following statements is correct? A) The lower the level of a firm’s debt, the higher the firm’s leverage. B) The lower the level of a firm’s debt, the lower the firm’s equity multiplier. C) The lower the level of a firm’s debt, the higher the firm’s equity multiplier. D) The tax benefit from using debt financing reduces a firm’s risk.

firm A has a lower equity multiplier than firm B.

44. If firm A has a higher debt-to-equity ratio than firm B, then A) firm A has a lower equity multiplier than firm B. B) firm B has a lower equity multiplier than firm A. C) firm B has lower financial leverage than firm A. D) None of the above.

A leveraged firm is less risky than a firm that is not leveraged.

45. Which one of the following statements is NOT correct? A) A leveraged firm is more risky than a firm that is not leveraged. B) A leveraged firm is less risky than a firm that is not leveraged. C) A firm that uses debt magnifies the return to its shareholders. D) All of the above statements are correct.

a firm’s creditors to assess how well the firm will meet its interest obligations.

46. Coverage ratios, like times interest earned and cash coverage ratio, allow A) a firm’s management to assess how well they meet short-term liabilities. B) a firm’s shareholders to assess how well the firm will meet its short-term liabilities. C) a firm’s creditors to assess how well the firm will meet its interest obligations. D) a firm’s creditors to assess how well the firm will meet its short-term liabilities other than interest expense.

ROE = ROA.

47. For a firm that has no debt in its capital structure, A) ROE > ROA. B) ROE < ROA. C) ROE = ROA. D) None of the above.

ROE &gt; ROA.

48. For a firm that has both debt and equity, A) ROE > ROA. B) ROE < ROA. C) ROE = ROA D) None of the above.

All of the above are correct.

49. Which one of the following statements is NOT correct? A) The DuPont system is based on two equations that relate a firm’s ROA and ROE. B) The DuPont system is a set of related ratios that links the balance sheet and the income statement. C) Both management and shareholders can use this tool to understand the factors that drive a firm’s ROE. D) All of the above are correct.

net profit margin, total asset turnover, and the equity multiplier

50. The DuPont equation shows that a firm’s ROE is determined by three factors: A) net profit margin, total asset turnover, and the equity multiplier B) operating profit margin, ROA, and the ROE C) net profit margin, total asset turnover, the ROA D) ROA, total assets turnover, and the equity multiplier

All of the above are criticisms of ROE as a goal.

51. Which one of the following is a criticism of equating the goals of maximizing the ROE of a firm and maximizing the firm’s shareholder wealth? A) ROE is based on after-tax earnings, not cash flows. B) ROE does not consider risk. C) ROE ignores the size of the initial investment as well as future cash flows. D) All of the above are criticisms of ROE as a goal.

ROE does not consider risk.

52. Which one of the following is NOT an advantage of using ROE as a goal? A) ROE is highly correlated with shareholder wealth maximization. B) ROE and the DuPont analysis allow management to break down the performance and identify areas of strengths and weaknesses. C) ROE does not consider risk. D) All of the above are advantages of using ROE as a goal.

The Standard Industrial Classification (SIC) System is used to identify benchmark firms.

53. Which one of the following statements about trend analysis is NOT correct? A) This benchmark is based on a firm’s historical performance. B) It allows management to examine each ratio over time and determine whether the trend is good or bad for the firm. C) The Standard Industrial Classification (SIC) System is used to identify benchmark firms. D) All of the above are true statements.

Only a and b relate to peer group analysis.

54. Peer group analysis can be performed by A) management choosing a set of firms that are similar in size or sales, or who compete in the same market. B) using the average ratios of this peer group, which would then be used as the benchmark. C) identifying firms in the same industry that are grouped by size, sales, and product lines in order to establish benchmark ratios. D) Only a and b relate to peer group analysis.

All of the above are limitations of ratio analysis.

55. Limitations of ratio analysis include all but A) Ratios depend on accounting data based on historical costs. B) Differences in accounting practices like FIFO versus LIFO make comparison difficult. C) Trend analysis could be distorted by financial statements affected by inflation. D) All of the above are limitations of ratio analysis.

1.01

56. Liquidity ratio: Lionel, Inc., has current assets of $623,122, including inventory of $241,990, and current liabilities of 378,454. What is the quick ratio? A) 1.65 B) 0.64 C) 1.01 D) None of the above Feedback: Current assets = $623,122 Current liabilities = $378,454 Inventory = $241,990

1.83

57. Liquidity ratio: Bathez Corp. has receivables of $334,227, inventory of $451,000, cash of $73,913, and accounts payables of $469,553. What is the firm’s current ratio? A) 1.83 B) 0.73 C) 1.67 D) None of the above Feedback: Current assets = $73,913 + $451,000 +$334,227 = $859,140 Current liabilities = $469,553

1.20

58. Liquidity ratio: Zidane Enterprises has a current ratio of 1.92, current liabilities of $272,934, and inventory of 197,333. What is the firm’s quick ratio? A) 0.72 B) 1.20 C) 1.92 D) None of the above Feedback: Current ratio = 1.92 Current liabilities = $272,934 Inventory = $197,333

$777,777

59. Liquidity ratio: Ronaldinho Trading Co. is required by its bank to maintain a current ratio of at least 1.75, and its current ratio now is 2.1. The firm plans to acquire additional inventory to meet an unexpected surge in the demand for its products and will pay for the inventory with short-term debt. How much inventory can the firm purchase without violating its debt agreement if their total current assets equal $3.5 million? A) $0 B) $777,777 C) $1 million D) None of the above Feedback: Let X represent the additional borrowing against the firm’s line of credit (which also equals the addition to current assets). We can solve for that level of X that forces the firm’s current ratio to be at 1.75 $3,500,000/ Current liabilities = 2.1 Current liabilities = $1,666,667 1.75 = ($3,500,000 + X) / ($1,666,667 + X) (1.75 * $1,666,667) + 1.75X = $3,500,000 + X 0.75X = $3,500,000 – $2,916,667 X = $777,777

2.95 times

60. Efficiency ratio: If Randolph Corp. has accounts receivables of $654,803 and net sales of $1,932,349, what is its accounts receivable turnover? A) 0.34 times B) 1.78 times C) 2.95 times D) None of the above Feedback: Accounts receivables = $654,803 Net sales = $1,932,349

$881,234

61. Efficiency ratio: If Viera, Inc., has an accounts receivable turnover of 3.9 times and net sales of $3,436,812, what is its level of receivables? A) $881,234 B) $13,403,567 C) $1,340,357 D) $81,234 ` Feedback: Accounts receivables turnover = 3.9x Net sales = $3,436,812

3.16 times

62. Efficiency ratio: Jason Traders has sales of $833,587, a gross profit margin of 32.4 percent, and inventory of $178,435. What is the company’s inventory turnover ratio? A) 4.67 times B) 3.16 times C) 4.1 times D) None of the above ` Feedback: Sales = $833,587 Gross profit margin = 32.4% Inventory = $178,435

65.2 days

63. Efficiency ratio: Gateway Corp. has an inventory turnover ratio of 5.6. What is the firm’s days’ sales in inventory? A) 65.2 days B) 64.3 days C) 61.7 days D) 57.9 dayS

4.26 times; 85.7 days

64. Efficiency ratio: Jet, Inc., has net sales of $712,478 and accounts receivables of $167,435. What are the firm’s accounts receivables turnover and days’ sales outstanding? A) 0.24 times; 78.5 days B) 4.26 times; 85.7 days C) 5.2 times; 61.3 days D) None of the above

$2,074,557

65. Efficiency ratio: Ellicott City Manufacturers, Inc., has sales of $6,344,210, and a gross profit margin of 67.3 percent. What is the firm’s cost of goods sold? A) $2,074,557 B) $2,745,640 C) $274,560 D) None of the above

-$373,816.23

66. Efficiency ratio: Deutsche Bearings has total sales of $9,745,923, inventories of $2,237,435, cash and equivalents of $755,071, and days’ sales outstanding of 49 days. If the firm’s management wanted its DSO to be 35 days, by how much will the accounts receivable have to change? A) $373,816.23 B) -$373,816.23 C) -$379,008.12 D) $379,008.12

12 times

67. Coverage ratio: Trident Corp. has debt of $3.35 million with an interest rate of 6.875 percent. The company has an EBIT of $2,766,009. What is its times interest earned? A) 13 times B) 12 times C) 11 times D) None of the above

14.15 times

68. Coverage ratios: Sectors, Inc., has an EBIT of $7,221,643 and interest expense of $611,800. Its depreciation for the year is $1,434,500. What is its cash coverage ratio? A) 15.42 times B) 18.34 times C) 14.15 times D) None of the above

13.8 times; 19.4 times

69. Coverage ratios: Fahr Company had depreciation expenses of $630,715, interest expenses of $112,078, and an EBIT of $1,542,833 for the year ended June 30, 2006. What are the times interest earned and cash coverage ratios for this company? A) 19.4 times; 12.7 times B) 17.3 time; 11.4 times C) 13.8 times; 19.4 times D) None of the above

1.47

70. Leverage ratio: Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio? A) 0.60 B) 1.47 C) 1.74 D) 0 Feedback: Equity multiplier = 1 + Debt to equity Debt to equity = Equity multiplier -1 = 2.47 – 1 = 1.47

1.82

71. Leverage ratio: What will be a firm’s equity multiplier given a debt ratio of 0.45? A) 1.82 B) 1.28 C) 2.22 D) None of the above

2.31; 1.31

72. Leverage ratio: Dreisen Traders has total debt of $1,233,837 and total assets of $2,178,990. What are the firm’s equity multiplier and debt-to-equity ratio?(Round to nearest whole percent) A) 2.31; 1.31 B) 1.75; 0.75 C) 0.75; 1.75 D) 1.31; 2.31 ` Feedback: Debt ratio = $1,233,837 / $2,178,990 = 0.57

5.17 times

73. Market-value ratio: RTR Corp. has reported a net income of $812,425 for the year. The company’s share price is $13.45, and the company has 312,490 shares outstanding. Compute the firm’s price-earnings ratio. A) 4.87 times B) 8.12 times C) 5.17 times D) None of the above

$34.05

74. Market-value ratios: Perez Electronics Corp. has reported that its net income for 2006 is $1,276,351. The firm has 420,000 shares outstanding and a P-E ratio of 11.2 times. What is the firm’s share price? A) $34.05 B) $3.68 C) $11.20 D) $36.80

27.4%

75. Profitability ratio: Juventus Corp has total assets of $4,744,288, total debt of $2,912,000, and net sales of $7,212,465. Their net profit margin for the year is 18 percent. What is Juventus’s ROA? A) 25.6% B) 18% C) 27.4% D) None of the above

3.7%; 1.90

76. DuPont equation: GenTech Pharma has reported the following information: Sales/Total assets = 2.89; ROA = 10.74%; ROE = 20.36% What are the firm’s profit margin and equity multiplier? A) 7.1%; 0.53 B) 7.1%; 1.90 C) 3.7%; 0.53 D) 3.7%; 1.90

34.7%; 32.6%

77. Profitability ratios: Tigger Corp. has reported the financial results for year-end 2006. Based on the information given, calculate the firm’s gross profit margin and operating profit margin. Net sales = $4,156,700 Net income = $778,321 Cost of goods sold = $2,715,334 EBIT = $1,356,098 A) 34.7%; 32.6% B) 32.6%; 18.72% C) 34.7%; 18.72% D) None of the above

34.7%

78. DuPont equation: Andrade Corp has debt of $2,834,950, total assets of $5,178,235, sales of $8,234,121, and net income of $812,355. What is the firm’s return on equity? A) 7.1%t B) 34.7% C) 28.1% D) 43.2%

$75,281.80

79. DuPont equation: Saunders, Inc., has a ROE of 18.7 percent, an equity multiplier of 2.53, sales of $2.75 million, and a total assets turnover of 2.7 times. What is the firm’s net income? A) $75,281.80 B) $514,250.00 C) $51,425.00 D) $7,528.10

7.48%

80. DuPont equation: Sorenstam Corp has an equity multiplier of 2.34 times, total assets of $4,512,895, a ROE of 17.5 percent, and a total assets turnover of 3.1 times. Calculate the firm’s ROA. A) 6.23% B) 4.53% C) 7.48% D) 5.79%

It can tell the analyst a great deal about the firm’s efficiency and profitability.

81. Which of the following is a benefit of a common-size income statement? A) It is very useful to assess how effectively a firm collected its accounts receivable. B) It reveals a great deal of information about the adequacy of a firm’s net working capital. C) It can tell the analyst a great deal about the firm’s efficiency and profitability. D) It reveals how effectively a firm has increased its sales.

It omits the least liquid current asset from the numerator of the ratio.

82. Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio? A) The quick ratio more accurately reflects a firm’s profitability. B) It omits the least liquid current asset from the numerator of the ratio. C) The current ratio does not include accounts receivable. D) It measures how "quickly" cash flows through the firm.

13.1%

83. Return on Equity: In the latest year, Photon, Inc. reported $276,000 in net income. The firm maintains a debt ratio of 30% and has total assets of $3,000,000. What is Photon’s return on equity? (Round off to the nearest 0.1%) A) 13.1% B) 14.6% C) 22.5% D) 18.7%

Utilize the DuPont system to analyze a firm’s performance.

84. Which of the following is not a method of "benchmarking"? A) Conduct an industry group analysis. B) Utilize the DuPont system to analyze a firm’s performance. C) Evaluating a single firm’s performance over time. D) Identify a group of firms that compete with the company being analyzed.

Ratio analysis requires the analyst to utilize accounting data that is based on historical costs instead of current market values.

85. There are those that believe that the analysis of financial statements has limitations. Which of the statements below would qualify as a limitation of financial statement analysis? A) Ratio analysis requires the analyst to evaluate a firm’s performance over too many years to be of any value. B) Proper ratio analysis requires the analyst to rely upon audited financial statements, which can be easily manipulated. C) Thorough ratio analysis requires the analyst to refer to benchmarking, which is very easy to misinterpret. D) Ratio analysis requires the analyst to utilize accounting data that is based on historical costs instead of current market values.

All of the above.

[CHAPTER 7] 36. The expected return for a portfolio without borrowing A) should never be less than the expected return of the asset with lowest expected return. B) should never be greater than the expected return of the asset with highest expected return. C) may not be an event with even a positive probability of occurrence. D) All of the above.

$80

37. In a game of chance, the probability of winning a $50 prize is 40 percent, and the probability of winning a $100 prize is 60 percent. What is the expected value of a prize in the game? A) $50 B) $75 C) $80 D) $100 ` Feedback: $50(0.4) + $100 (0.6) = $80

-$10

38. In a game of chance, the probability of winning a $50 is 40 percent and the probability of losing a $50 prize is 60 percent. What is the expected value of a prize in the game? A) -$10 B) $0 C) $10 D) $25 ` Feedback: $50(0.4) – $50 (0.6) = -$10

beta

39. Which of the following is the best measure of the systematic risk in a portfolio? A) variance B) standard deviation C) covariance D) beta

18.75%

40. Use the following table to calculate the expected return for the asset. Return Probability 0.1 0.25 0.2 0.5 0.25 0.25 A) 15.00% B) 17.50% C) 18.75% D) 20.00% Feedback: (0.1)(0.25) + (0.2)(0.5) + (0.25)(0.25) = 0.1875

15.75%

41. Use the following table to calculate the expected return for the asset. Return Probability 0.05 0.1 0.1 0.15 0.15 0.5 0.25 0.25 A) 12.50% B) 13.75% C) 15.75% D) 16.75% ` Feedback: (0.5)(0.1) + (0.1)(0.15) + (0.15)(0.5) + (0.25)(0.25) = 0.1575

0.002969

42. The expected return for the asset below is 18.75 percent. If the return distribution for the asset is described as in the following table, what is the variance for the asset’s returns? Return Probability 0.1 0.25 0.2 0.5 0.25 0.25 A) 0.002969 B) 0.000613 C) 0.015195 D) 0.054486 Feedback: (0.1)(0.25 – 0.1875)2 + (0.2)(0.5 – 0.1875) 2 + (0.25)(0.25 – 0.1875) 2 = 0.002969

0.054486

43. The expected return for the asset shown in the following table is 18.75 percent. If the return distribution for the asset is described as below, what is the standard deviation for the asset’s returns? Return Probability 0.1 0.25 0.2 0.5 0.25 0.25 A) 0.002969 B) 0.000613 C) 0.015195 D) 0.054486 `Feedback: { (0.25)(0.10 – 0.1875)2 + (0.5)(0.2 – 0.1875) 2 + (0.25)(0.25 – 0.1875) 2 }1/2 = 0.054486

None of the above is generally true.

44. If you are dealing with percentage returns, then which of the following is generally true? A) The variance of the return distribution is generally smaller than the standard deviation. B) The variance of the return distribution is generally larger than the standard deviation. C) The variance of the return distribution is measured in the same units as expected return. D) None of the above is generally true.

0.10

45. The return distribution for an asset is as shown in the following table. What are the missing values if the expected return is 10 percent? Return Probability 0.1 0.25 x 0.5 x 0.25 A) 0.20 B) 0.15 C) 0.10 D) None of the above

30%

46. The expected return for Stock Z is 30 percent. If we know the following information about Stock Z, then what return will it produce in the Lukewarm state of the world? Return Probability Poor 0.2 0.25 Lukewarm ? 0.5 Dynamite! 0.4 0.25 A) 20% B) 30% C) 40% D) It is impossible to determine. Feedback: (0.25)(0.2) + (0.5)(X) + (0.25)(0.4) = 0.3 , X = 0.3

10%

47. The expected return for Stock V is 24.5 percent. If we know the following information about Stock Z, then what is the probability of the Dynamite state of the world occurring? Return Probability Poor 0.15 0.2 Lukewarm 0.28 0.7 Dynamite! 0.19 ? A) 5% B) 10% C) 15% D) 20% Feedback: 0.2 + 0.7 + X = 1.0 ===> X = 0.1 or 10%

50%

48. Ahmet purchased a stock for $45 one year ago. The stock is now worth $65. During the year, the stock paid a dividend of $2.50. What is the total return to Ahmet from owning the stock? (Round your answer to the nearest whole percent.) A) 5% B) 44% C) 35% D) 50%

$5

49. Julio purchased a stock one year ago for $27. The stock is now worth $32, and the total return to Julio for owning the stock was 37 percent. What is the dollar amount of dividends that he received for owning the stock during the year? A) $4 B) $5 C) $6 D) $7

20%

50. Francis purchased a stock one year ago for $20, and it is now worth $24. The stock paid a dividend of $3 during the year. What was the stock’s rate of return from capital appreciation during the year? (Round your answer to the nearest percent.) A) 17% B) 20% C) 29% D) 35%

6%

51. Gwen purchased a stock one year ago for $25, and it is now worth $31. The stock paid a dividend of $1.50 during the year. What was the stock’s rate of return income during the year? (Round your answer to the nearest percent.) A) 6% B) 15% C) 24% D) 26%

$8.00

52. Gunther earned a 62.5 percent return on a stock that he purchased one year ago. The stock is now worth $12, and he received a dividend of $1 during the year. How much did Gunther originally pay for the stock? A) $7.00 B) $7.50 C) $8.00 D) $8.50

Both b and c must be true.

53. Moshe purchased a stock for $30 last year. He found out today that he had a -100 percent return on his investment. Which of the following must be true? A) The stock is worth $30 today. B) The stock is worth $0 today C) The stock paid no dividends during the year. D) Both b and c must be true.

$4,250

54. Babs purchased a piece of real estate last year for $85,000. The real estate is now worth $102,000. If Babs needs to have a total return of 25 percent during the year, then what is the dollar amount of income that she needed to have to reach her objective? A) $3,750 B) $4,250 C) $4,750 D) $5,250

$125,000

55. Genaro needs to capture a return of 40 percent for his one-year investment in a property. He believes that he can sell the property at the end of the year for $150,000 and that the property will provide him with rental income of $25,000. What is the maximum amount that Genaro should be willing to pay for the property? A) $112,500 B) $125,000 C) $137,500 D) $150,000

38%

56. Books Brothers stock was priced at $15 per share two years ago. The stock sold for $13 last year and now it sells for $18. What was the total return for owning Books Brothers stock during the most recent year? Assume that no dividends were paid and round to the nearest percent. A) 17% B) 20% C) 23% D) 38%

16%

57. Serox stock was selling for $20 two years ago. The stock sold for $25 one year ago, and it is currently selling for $28. Serox pays a $1.10 dividend per year. What was the rate of return for owning Serox in the most recent year? (Round to the nearest percent.) A) 12% B) 16% C) 32% D) 40%

1.91 inches

58. You have observed that the average size of a particular goldfish is 1.5 inches long. The standard deviation of the size of the goldfish is 0.25 inches. What is the size of a goldfish such that 95 percent of the goldfish are smaller? Assume a normal distribution for the size of goldfish. A) 1.01 inches B) 1.09 inches C) 1.91 inches D) 1.99 inches Feedback: 1.5 + 1645 (0.25) = 1.91 inches

53.95 pounds

59. You know that the average college student eats 0.75 pounds of food at lunch. If the standard deviation of that eating is 0.2 pounds of food, then what is the total amount of food that a cafeteria should have on hand to be 95percent confident that it will not run out of food when feeding 50 college students. A) 17.90 pounds B) 21.05 pounds C) 53.95 pounds D) 57.10 pounds Feedback: 50 students * {0.75 pounds per student + 1.645 (0.2 pounds per student)} = 53.95 pounds of food required.

2.50%

60. If a random variable is drawn from a normal distribution, what is the probability that the random variable is larger than 1.96 standard deviations larger than the mean? A) 1.25% B) 2.50% C) 3.75% D) 5.00%

97.50%

61. If a random variable is drawn from a normal distribution, what is the probability that the random variable is larger than 1.96 standard deviations below the mean? A) 95.00% B) 96.25% C) 97.50% D) 98.75%

$104,597.50

62. Niles is making an investment with an expected return of 12 percent. If the standard deviation of the return is 4.5 percent, and if Niles is investing $100,000, then what dollar amount is Niles 95 percent sure that he will have at the end of the year? A) $100,000.00 B) $104,597.50 C) $116,500.00 D) $119,402.50 Feedback: { 1 + [0.12 – 1.645 (0.045)]} X $100,000 = $104,597.50

Small U.S. Stocks

63. Which of the following investment classes had the greatest average return based on recent historical data? A) Intermediate-Term Government Bonds B) Long-Term Government Bonds C) Large U.S. Stocks D) Small U.S. Stocks

Small U.S. Stocks

64. Which of the following investment classes had the greatest variability in returns for recent historical data? A) Intermediate-Term Government Bonds B) Long-Term Government Bonds C) Large U.S. Stocks D) Small U.S. Stocks

The returns of the individual stock will show more variability than those of the market index.

65. If you were to compare the returns of an individual stock to a market index, select the answer below that is most true. A) The returns of the individual stock will show more variability than those of the market index. B) The returns of the individual stock will show less variability than those of the market index. C) The returns of the individual stock will show the same level of variability than those of the market index, if they have the same beta. D) None of the above.

0.0467

66. Tommie has made an investment that will generate returns that are subject to the state of the economy during the year. Use the following information to calculate the standard deviation of the return distribution for Tommie’s investment. State Return Probability Weak 0.13 0.3 OK 0.2 0.4 Great 0.25 0.3 A) 0.0453 B) 0.0467 C) 0.0481 D) 0.0495

0.0557

67. Elrond has made an investment that will generate returns that are subject to the state of the economy. Use the following information to calculate the variance of the return distribution for Elrond’s investment. State Return Probability Weak 0.10 0.8 OK 0.1 0.1 Great 0.28 0.1 A) 0.0536 B) 0.0543 C) 0.0550 D) 0.0557

0.5556

68. Braniff Ground Services stock has an expected return of 9 percent and a variance of 0.25 percent. What is the coefficient of variation for Braniff? A) 0.0278 B) 0.5556 C) 1.800 D) 36.00

0.000625

69. Sayers purchased a stock with a coefficient of variation equal to 0.125. The expected return on the stock is 20 percent. What is the variance of the stock? A) 0.000625 B) 0.025000 C) 0.625000 D) 0.790500

16.8%

70. You have invested 40 percent of your portfolio in an investment with an expected return of 12 percent and 60 percent of your portfolio in an investment with an expected return of 20 percent. What is the expected return of your portfolio? A) 15.2% B) 16.0% C) 16.8% D) 17.6%

8.2%

71. You have invested 20 percent of your portfolio in Homer, Inc., 40 percent in Marge Co., and 20 percent in Bart Resources. What is the expected return of your portfolio if Homer, Marge, and Bart have expected returns of 2 percent, 18 percent, and 3 percent, respectfully? A) 7.7% B) 8.2% C) 8.7% D) 9.2%

12.4%

72. You invested $3,000 in a portfolio with an expected return of 10 percent and $2,000 in a portfolio with an expected return of 16 percent. What is the expected return of the combined portfolio? A) 6.2% B) 12.4% C) 13.0% D) 13.6%

0.000094

73. Given the returns for two stocks with the following information, calculate the covariance of the returns for the two stocks. Assume the expected return is 10.8 percent for Stock 1 and 9.7 percent for Stock 2. Prob Stock 1 Stock 2 0.4 0.09 0.11 0.5 0.11 0.08 0.1 0.17 0.13 A) 0.000094 B) 0.00051600 C) 0.00032100 D) 0.71750786 Cov(R1,R2) =0.4(0.09-0.108)(0.11-0.097)+0.5(0.11-0.108)(0.08-0.097)+0.1(0.17-0.108)(0.13-0.097) = 0.000094

0.230967

74. Given the returns for two stocks with the following information, calculate the correlation coefficient of the returns for the two stocks. Assume the expected return for Stock 1 is 10.8 percent and 9.7 percent for Stock 2. Prob Stock 1 Stock 2 0.4 0.09 0.11 0.5 0.11 0.08 0.1 0.17 0.13 A) 0.230967 B) -0.00002548 C) 0.00032100 D) 0.17671455

-0.00079

75. Given the returns for two stocks with the following information, calculate the covariance of the returns for the two stocks. Assume the expected return is 14.4 percent for Stock 1 and 15.9 percent for Stock 2. Prob Stock 1 Stock 2 0.5 0.11 0.18 0.3 0.17 0.15 0.2 0.19 0.12 A) 0.001204001 B) 0.000549003 C) -0.00079 D) -0.3372012 Cov(R1,R2) = . (0.5(0.11-0.144)(0.18-0.159)+0.3(0.17-0.144)(0.15-0.159)+0.2(0.19-0.144)(0.12-0.159) = -0.00079

-0.971689

76. Given the returns for two stocks with the following information, calculate the correlation coefficient of the returns for the two stocks. Assume the expected return is 14.4 percent for Stock 1 and 15.9 percent for Stock 2. Prob Stock 1 Stock 2 0.5 0.11 0.18 0.3 0.17 0.15 0.2 0.19 0.12 A) 0.001204001 B) 0.000549003 C) -0.00271370 D) -0.971689 Cov(R1,R2) = -0.00079 so p = – .00079 = -.971689 (.03469873)(.02343075)

0.090437

77. The covariance of the returns between Einstein Stock and Bohr Stock is 0.0087. The standard deviation of Einstein is 0.26, and the standard deviation of Bohr is 0.37. What is the correlation coefficient between the returns of the two stocks? A) 0.090437 B) 0.096200 C) 0.90437 D) 0.96200

0.578731

78. The covariance of the returns between Wildcat Stock and Sun Devil Stock is 0.09875. The variance of Wildcat is 0.2116, and the variance of Sun Devil is 0.1369. What is the correlation coefficient between the returns of the two stocks? A) 0.170200 B) 0.293347 C) 0.340823 D) 0.578731

0.028025

79. Horse Stock returns have exhibited a standard deviation of 0.57, whereas Mod T Stock returns have a standard deviation of 0.63. The correlation coefficient between the returns is 0.078042. What is the covariance of the returns? A) 0.028025 B) 0.217327 C) 0.359100 D) 0.993094

0.2179

80. Batman Stock has exhibited a standard deviation in stock returns of 0.5, whereas Superman Stock has exhibited a standard deviation of 0.6. The correlation coefficient between the stock returns is 0.5. What is the variance of a portfolio composed of 70 percent Batman and 30 percent Superman? A) 0.1549 B) 0.2179 C) 0.4668 D) 0.5500

0.56676

81. Aquaman Stock has exhibited a standard deviation in stock returns of 0.7, whereas Green Lantern Stock has exhibited a standard deviation of 0.8. The correlation coefficient between the stock returns is 0.1. What is the standard deviation of a portfolio composed of 70 percent Aquaman and 30 percent Green Lantern? A) 0.32122 B) 0.54562 C) 0.56676 D) 0.75000

15 to 20 stocks

82. Most of the risk-reduction benefits from diversification can be achieved in a portfolio consisting of A) 5 to 10 stocks B) 10 to 15 stocks C) 15 to 20 stocks D) 20 to 25 stocks

An investor with a 50-asset portfolio.

83. Which of the following investors should be willing to pay the highest price for an asset? A) An investor with a single-asset portfolio. B) An investor with a 50-asset portfolio. C) An investor who is not completely diversified. D) An investor who is so risk-averse that he does not recognize the benefits of diversification.

equal to one

84. A portfolio with a level of systematic risk the same as that of the market has a beta that is A) equal to zero. B) equal to one. C) less than the beta of the risk-free asset. D) less than zero.

19.20%

85. The beta of Elsenore, Inc., stock is 1.6, whereas the risk-free rate of return is 8 percent. If the expected return on the market is 15 percent, then what is the expected return on Elsenore? A) 11.20% B) 19.20% C) 24.00% D) 32.00%

37.80%

86. The beta of RicciCo.’s stock is 3.2, whereas the risk-free rate of return is 9 percent. If the expected return on the market is 18 percent, then what is the expected return on RicciCo.? A) 28.80% B) 37.80% C) 48.60% D) 57.60%

13.80%

87. The risk-free rate of return is currently 3 percent, whereas the market risk premium is 6 percent. If the beta of Lenz, Inc., stock is 1.8, then what is the expected return on Lenz? A) 8.40% B) 10.80% C) 13.80% D) 19.20%

2.10

88. The expected return on Kiwi Computers stock is 16.6 percent. If the risk-free rate is 4 percent and the expected return on the market is 10 percent, then what is Kiwi’s beta? A) 1.26 B) 2.10 C) 2.80 D) 3.15

6.0%

89. The expected return on Mike’s Seafood stock is 17.9 percent. If the expected return on the market is 13 percent and the beta for Kiwi is 1.7, then what is the risk-free rate? A) 4.5% B) 5.0% C) 5.5% D) 6.0%

5.0%

90. The expected return on KarolCo. stock is 16.5 percent. If the risk-free rate is 5 percent and the beta of KarolCo is 2.3, then what is the risk premium on the market? A) 2.5% B) 5.0% C) 7.5% D) 10.0%

When choosing between two investments that have the same level of risk, investors prefer the investment with the higher return.

91. Which of the following statements is most correct? A) The greater the risk associated with an investment, the lower the return investors expect from it. B) When choosing between two investments that have the same level of risk, investors prefer the investment with the higher return. C) If two investments have the same expected return, investors prefer the riskiest alternative. D) When choosing between two investments that have the same level of risk, investors prefer the investment with the lower return.

16.00%

92. Holding Period Return: George Wilson purchased Bright Light Industries common stock for $47.50 on January 31, 2010. The firm paid dividends of $1.10 during the last 12 months. George sold the stock today (January 30, 2011) for $54.00. What is George’s holding period return? Round off the nearest 0.01%. A) 16.00% B) 14.35% C) 11.28% D) 19.60%

$3.17

93. Expected Return: Security Analysts that have evaluated Concordia Corporation have determined that there is a 15% chance that the firm will generate earnings per share of $2.40; a 60% probability that the firm will generate earnings per share of $3.10; and a 25% probability that the firm will generate earnings per share of $3.80. What are the expected earnings per share for Concordia Corporation? (Round off to the nearest $0.01) A) $3.10 B) $3.17 C) $2.75 D) $2.91 Feedback: Probability ProjectedEPS Expected EPS 15.00% $2.40 $0.36 60.00% 3.10 1.86 25.00% 3.80 0.95 100.00% $3.17

10.46%

94. Standard Deviation: View Point Industries has forecast a rate of return of 20.00% if the economy booms (25.00% probability); a rate of return of 15.00% if the economy in in a growth phase (45.00% probability); a rate of return of 2.50% if the economy in in decline (20.00% probability); and a rate of return of -15.00% if the economy in a depression (10.00% probability). What is View Point’s standard deviation of returns? A) 17.31% B) 9.25% C) 15.00% D) 10.46%

The security market line.

95. Which of the following represents a plot of the relation between expected return and systemic risk? A) The beta coefficient. B) The covariance of returns line. C) The security market line. D) The variance.

All of the above are true.

[CHAPTER8] 31. In an efficient capital market, A) security prices fully reflect the knowledge and expectations of all investors at a particular point in time. B) investors and financial managers have no reason to believe the securities are not priced at or near their true value. C) prices of securities adjust as new information becomes available to the market. D) All of the above are true.

If market prices reflect all relevant information about securities at a particular point in time, the market is operationally efficient.

32. Which one of the following statements is NOT true? A) The overall efficiency of a capital market depends on its operational efficiency and its informational efficiency. B) Operational efficiency focuses on bringing buyers and sellers together at the lowest possible cost. C) If market prices reflect all relevant information about securities at a particular point in time, the market is operationally efficient. D) All of the above are true.

All of the above are true.

33. Which one of the following statements is NOT true? A) Competition among investors is an important driver of informational efficiency. B) If market prices reflect all relevant information about securities at a particular point in time, the market is informationally efficient. C) In an informationally efficient market, market prices adjust quickly to new information about a security as it becomes available. D) All of the above are true.

it would not be possible to earn abnormally high returns by trading on private information.

34. With strong-form market efficiency, A) the price of a security in the market reflects all public information only. B) it would not be possible to earn abnormally high returns by trading on private information. C) investors who have access to inside or private information will be able to earn abnormal returns. D) None of the above.

the price of a security in the market reflects all public information only

35. With semistrong-form market efficiency, A) the price of a security in the market reflects all public information only. B) it would be possible to earn abnormally high returns by trading on public information. C) investors who have access to inside or private information will be unable to earn abnormal returns. D) None of the above.

Strong-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns.

36. Which one of the following statements is NOT true? A) Weak-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns. B) Semistrong-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns. C) Strong-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns. D) None of the above.

All of the above are true.

37. Which ONE of the following statements is true? A) The largest investors in corporate bonds are life insurance companies and pension funds. B) The market for corporate bonds is thin. C) Prices in the corporate bond market also tend to be more volatile. D) All of the above are true.

Corporate bonds are more marketable than the securities that have higher daily trading volumes.

38. Which one of the following statements is NOT true? A) Prices in the corporate bond market also tend to be more volatile than the markets for stocks or money market securities. B) Corporate bonds are more marketable than the securities that have higher daily trading volumes. C) The market for corporate bonds is thin. D) The largest investors in corporate bonds are life insurance companies and pension funds.

None of the above statements are true.

39. It is easy for individuals to trade in the corporate bond market because A) the corporate bond market is considered to be very transparent. B) prices in the corporate bond market tend to be more stable. C) centralized reporting of deals between buyers and sellers take place. D) None of the above statements are true.

Coupon payments are usually made quarterly.

40. Which one of the following statements about vanilla bonds is NOT true? A) They have no special provisions. B) The face value, or par value, for most corporate bonds is $1,000. C) Coupon payments are usually made quarterly. D) The bond’s coupon rate is calculated as the annual coupon payment divided by the bond’s face value.

All of the above are true.

41. Which ONE of the following statements is true? A) Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity. B) Zero coupon bonds sell well below their face value (at a deep discount) because they offer no coupons. C) The most frequent and regular issuer of zero coupon securities is the U.S. Treasury Department. D) All of the above are true.

All of the above are true.

42. Which ONE of the following statements is true? A) To secure the conversion option on a bond, bondholders would be willing to pay a premium. B) The conversion ratio is set so that the firm’s stock price must appreciate 15 to 20 percent before it is profitable to convert bonds into equity. C) Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder. D) All of the above are true.

The value, or price, of any asset is the future value of its cash flows.

43. Which one of the following statements about bond price is NOT true? A) To compute a bond’s price, one needs to calculate the present value of the bond’s expected cash flows. B) The value, or price, of any asset is the future value of its cash flows. C) The required rate of return, or discount rate, for a bond is the market interest rate called the bond’s yield to maturity D) Estimate the expected future cash flows using the coupons that the bond will pay and the maturity value to be received.

at a price equal to its face value.

44. If a bond’s coupon rate is equal to the market rate, then the bond will sell A) at a price equal to its face value. B) at a price greater than its face value. C) at a price less than its face value. D) None of the above are true.

greater than the bond’s coupon rate.

45. Bonds sell at a discount off the par value when market rates for similar bonds are A) less than the bond’s coupon rate. B) greater than the bond’s coupon rate. C) equal to the bond’s coupon rate. D) Market rates are irrelevant in determining a bond’s price.

less than the bond’s coupon rate.

46. Bonds sell at a premium over the par value when market rates for similar bonds are A) less than the bond’s coupon rate. B) greater than the bond’s coupon rate. C) equal to the bond’s coupon rate. D) Market rates are irrelevant in determining a bond’s price.

All of the above need to be done.

47. In calculating the current price of a bond paying semiannual coupons, one needs to A) use double the number of years for the number of payments. B) use half the annual coupon. C) use half the annual rate as the discount rate. D) All of the above need to be done.

Zero coupon bonds make coupon payments but no principal payment at maturity.

48. Which one of the following statements about zero coupon bonds is NOT true? A) Zero coupon bonds have no coupon payments but promise a single payment at maturity. B) Zero coupon bonds must sell for less than similar bonds that make periodic coupon payments. C) Zero coupon bonds make coupon payments but no principal payment at maturity. D) All of the above statements are true.

All of the above are true.

49. Which one of the following statements is NOT true? A) The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. B) It is the yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised. C) A bond’s yield to maturity changes daily as interest rates increase or decrease. D) All of the above are true.

equal to the price of the bond.

50. The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments A) exceed the price of the bond. B) equal to zero. C) equal to the price of the bond. D) less than the price of the bond.

It is the interest rate at which the present value of the actual cash flows generated by the investment equals the bond’s price at the time of sale of the bond.

51. Which one of the following statements is NOT true? A) The realized yield is the return earned on a bond given the cash flows actually received by the investor. B) The realized yield is equal to the yield to maturity even if the bond is sold prior to maturity. C) It is the interest rate at which the present value of the actual cash flows generated by the investment equals the bond’s price at the time of sale of the bond. D) All of the above are true.

As interest rates increase, bond prices increase.

52. Which one of the following statements is NOT true? A) Interest rate risk is the risk that bond prices will change as interest rates change. B) Interest rate changes and bond prices are inversely related. C) As interest rates increase, bond prices increase. D) Long-term bonds are more price volatile than short-term bonds of similar risk.

As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of bonds decline.

53. Which ONE of the following statements is true? A) Long-term bonds have lower price volatility than short-term bonds. B) As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of bonds decline. C) All other things being equal, short-term bonds are more risky than long-term bonds. D) Interest rate risk decreases as maturity increases.

to sell a security quickly, at a low transaction cost, and at a price close to its fair market value.

54. Marketability is the ability of an investor A) to sell a security quickly, at a low transaction cost, and at a price close to its fair market value. B) to sell at a profit under all circumstances. C) to sell the security above its par value. D) None of the above.

All of the above are true

55. Which ONE of the following statements is true? A) The lower the transaction costs are, the greater a security’s marketability. B) The interest rate, or yield, on a security varies inversely with its degree of marketability. C) U.S. Treasury bills have the largest and most active secondary market and are considered to be the most marketable of all securities. D) All of the above are true.

Investors must pay a premium to purchase a security that exposes them to default risk.

56. Which one of the following statements is NOT true? A) The risk that the lender may not receive payments as promised is called default risk. B) Investors must pay a premium to purchase a security that exposes them to default risk. C) U.S. Treasury securities do not have any default risk and are the best proxy measure for the risk-free rate. D) All of the above are true statements.

the economy is in recession.

57. Inverted yield curves are observed when A) the economy is growing. B) the economy is stagnant. C) the economy is in recession. D) None of the above.

The relationship between yield and marketability is known as the term structure of interest rates.

58. Which one of the following statements is NOT true? A) The relationship between yield and marketability is known as the term structure of interest rates. B) The shape of the yield curve is not constant over time. C) As the general level of interest rises and falls over time, the yield curve shifts up and down and has different slopes. D) Yield curves show graphically how market yields vary as term to maturity changes.

the real rate of interest, the expected rate of inflation, and interest rate risk.

59. The three economic factors that determine the shape of the yield curve are A) the real rate of interest, the expected rate of inflation, and marketability. B) the real rate of interest, the expected rate of inflation, and interest rate risk. C) the nominal rate of interest, the expected rate of inflation, and interest rate risk. D) the real rate of interest, the nominal rate of interest, and interest rate risk.

The longer the maturity of a security, the greater its interest rate risk.

60. Which ONE of the following statements is true? A) The longer the maturity of a security, the greater its interest rate risk. B) If investors believe inflation will be subsiding in the future, the prevailing yield will be upward sloping. C) The real rate of interest varies with the business cycle, with the lowest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession. D) The interest risk premium always adds a downward bias to the slope of the yield curve.

$872

61. Bond price: Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Round to the nearest dollar.) A) $872 B) $1,066 C) $990 D) $945 Years to maturity = n = 10 Coupon rate = C = 7% Annual coupon = $1,000 x 0.07 = $70 Current market rate = i = 9% Present value of bond = PB

$1,066

62. Bond price: Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company’s bonds be priced at today? Assume annual coupon payments. (Round to the nearest dollar.) A) $972 B) $1,066 C) $1,014 D) $923 Years to maturity = n = 6 Coupon rate = C = 8.25% Annual coupon = $1,000 x 0.0825 = $82.50 Current market rate = i = 6.875%

$916

63. Bond price: Triumph Corp. issued five-year bonds that pay a coupon of 6.375 annually. The current market rate for similar bonds is 8.5 percent. How much will you be willing to pay for Triumph’s bond today? Round to the nearest dollar. A) $1,023 B) $1,137 C) $916 D) $897

$1,107

64. Bond price: Your friend recommends that you invest in a three-year bond issued by Trimer, Inc., that will pay annual coupons of 10 percent. Similar investments today will yield 6 percent. How much should you pay for the bond? (Round to the nearest dollar.) A) $1,024 B) $979 C) $886 D) $1,107

$1,048

65. Bond price: Kevin Rogers is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis. The current market rate for similar bonds is 8.8 percent. What should be the current price of this bond? (Round to the nearest dollar.) A) $1,048 B) $965 C) $1,099 D) $982

$1,085

66. Bond price: Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Round to the nearest dollar.) A) $1,037 B) $1,085 C) $861 D) $923

Yes, the bond is worth more at $951.

67. Bond price: Jane Thorpe has been offered a seven-year bond issued by Barone, Inc., at a price of 943.22. The bond has a coupon rate of 9 percent and pays the coupon semiannually. Similar bonds in the market will yield 10 percent today. Should she buy the bonds at the offered price? (Round to the nearest dollar.) A) Yes, the bond is worth more at $1,015. B) No, the bond is only worth $921. C) Yes, the bond is worth more at $951. D) No, the bond is only worth $912.

$938

68. Bond price: Kevin Oh is planning to sell a bond that he owns. This bond has four years to maturity and pays a coupon of 10 percent on a semiannual basis. Similar bonds in the current market will yield 12 percent. What will be the price that he will get for his bond? (Round to the nearest dollar.) A) $1,044 B) $938 C) $970 D) $1,102

$1,195

69. Bond price: Jeremy Kohn is planning to invest in a 10-year bond that pays a 12 percent coupon. The current market rate for similar bonds is 9 percent. Assume semiannual coupon payments. What is the maximum price that should be paid for this bond? (Round to the nearest dollar.) A) $951 B) $882 C) $1,033 D) $1,195

$665

70. Zero coupon bonds: Shana Norris wants to buy five-year zero coupon bonds with a face value if $1,000. Her opportunity cost is 8.5 percent. Assuming annual compounding, what would be the current market price of these bonds? (Round to the nearest dollar.) A) $1,023 B) $665 C) $890 D) $1,113

$515

71. Zero coupon bonds: The U.S. Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that coupon payments are normally semiannual. What will be the current market price of these bonds if the opportunity cost for similar investments in the market is 6.75 percent? (Round to the nearest dollar.) A) $684 B) $860 C) $515 D) $604

$308

72. Zero coupon bonds: Robertsons, Inc., is planning to expand ita specialty stores into five other states and finance the expansion by issuing 15-year zero coupon bonds with a face value of $1,000. If your opportunity cost is 8 percent and similar coupon-bearing bonds will pay semiannually, what will be the price at which you will be willing to purchase these bonds? (Round to the nearest dollar.) A) $308 B) $383 C) $803 D) $866

$258

73. Zero coupon bonds: Jarmine Corp. is planning to fund a project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual coupons to be the norm, what will be the price of these bonds if the appropriate discount rate is 14 percent? (Round to the closest answer.) A) $852 B) $258 C) $419 D) $841

8.5%

74. Yield to maturity: Jenny LePlaz is looking to invest in some five-year bonds that pay annual coupons of 6.25 percent and are currently selling at $912.34. What is the current market yield on such bonds? (Round to the closest answer.) A) 9.5% B) 8.5% C) 6.5% D) 7.5%

8.4%

75. Yield to maturity: Nathan Akpan is planning to invest in a seven-year bond that pays annual coupons at a rate of 7 percent. It is currently selling at $927.23. What is the current market yield on such bonds? (Round to the closest answer.) A) 10.4% B) 9.5% C) 8.4% D) 7.5%

7.5%

76. Yield to maturity: Jane Almeda is interested in a 10-year bond issued by Roberts Corp. that pays a coupon of 10 percent annually. The current price of this bond is $1,174.45. What is the yield that Jane would earn by buying it at this price and holding it to maturity? (Round to the closest answer.) A) 7% B) 7.5% C) 8% D) 8.5%

12.2%

77. Yield to maturity: Shawna Carter wants to invest her recent bonus in a four-year bond that pays a coupon of 11 percent semiannually. The bonds are selling at $962.13 today. If she buys this bond and holds it to maturity, what would be her yield? (Round to the closest answer.) A) 11.5% B) 11.8% C) 12.5% D) 12.2%

13%

78. Yield to maturity: Alice Trang is planning to buy a six-year bond that pays a coupon of 10 percent semiannually. Given the current price of $878.21, what is the yield to maturity on these bonds? A) 11% B) 12% C) 13% D) 14%

5.7%

79. Yield to maturity: John Wong purchased a five-year bond today at $1,034.66. The bond pays 6.5 percent semiannually. What will be his yield to maturity? A) 6.7% B) 6.2% C) 5.9% D) 5.7%

9.6%

80. Yield to maturity: Huan Zhang bought a 10-year bond that pays 8.25 percent semiannually for $911.10. What is the yield to maturity on this bond? A) 7.6% B) 8.6% C) 9.6% D) 10.6%

10%

81. Realized yield: Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent semiannually for $981.10. Today, she sold it for $1,067.22. What is the realized yield on her investment? (Round to the nearest percent.) A) 7% B) 8% C) 9% D) 10%

17%

82. Realized yield: Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a coupon of 15 percent semiannually. Today, the bond is priced at $961.92. If she sold the bond today, what would be her realized yield? (Round to the nearest percent.) A) 17% B) 18% C) 9% D) 10%

11%

83. Realized yield: Jorge Cabrera paid $980 for a 15-year bond 10 years ago. The bond pays a coupon of 10 percent semiannually. Today, the bond is priced at $1,054.36. If he sold the bond today, what would be his realized yield? (Round to the nearest percent.) A) 12% B) 8% C) 11% D) 9%

6.50%

84. Effective annual yield: Suppose an investor earned a semiannual yield of 6.4 percent on a bond paying coupons twice a year. What is the effective annual yield (EAY) on this investment? A) 12.80% B) 6.40% C) 6.50% D) None of the above

6.81%

85. Effective annual yield: Stanley Hart invested in a municipal bond that promised an annual yield of 6.7 percent. The bond pays coupons twice a year. What is the effective annual yield (EAY) on this investment? A) 13.4% B) 6.81% C) 6.70% D) None of the above

C) Firms that issue convertible bonds can do so at a lower interest rate.

86. Which of the following statements is true about convertible bonds? A) The most significant disadvantage to a corporation of issuing convertible bonds is that they increase the cash that the firm must use to make interest payments. B) The typical conversion ratio is set so that the firm’s stock price must appreciate 5% or less before it is profitable for the holder to convert the bond to stock. C) Firms that issue convertible bonds can do so at a lower interest rate. D) The typical issue of convertible bonds allows the holder of the bond to convert it to preferred stock.

They typically sell at a deep discount below par when they are first issued.

87. Which of the following statements is most true about zero coupon bonds? A) They typically sell at a premium over par when they are first issued. B) They typically sell for a higher price than similar coupon bonds. C) They are always convertible to common stock. D) They typically sell at a deep discount below par when they are first issued.

If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond.

88. Which of the following statements is true? A) For a given change in market interest rates, the prices of higher-coupon bonds change more that the prices of lower-coupon bonds. B) If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond. C) If interest rates rise, bond prices will rise. D) If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond.

Because investors are risk averse, they require a premium to purchase a security that exposes them to default risk.

89. Which of the following statements is true? A) Investment grade bonds are those rated single B and higher. B) Federal laws typically allow insurance companies and pension funds to purchase non-investment grade bonds. C) Because investors are risk averse, they require a premium to purchase a security that exposes them to default risk. D) All else equal, the higher a bond’s rating the higher the coupon rate.

Interest rate risk always provides an upward bias to the slope of the yield curve.

90. Which of the following statements is true? A) Downward sloping yield curves typically appear in the early to mid-period of a business expansion. B) Interest rate risk always provides an upward bias to the slope of the yield curve. C) If investors believe that inflation will be increasing in the near future, the yield curve will be downward sloping. D) Downward or inverted yield curves are the type most commonly observed.