20 questions Finance
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1. If an investor’s required rate of return is 9.6%, what is the present value of the
following cash flows: $7,000 at end of year one, $11,000 at end of year two,
$15,000 at end of year three, and $22,000 at the end of year four?
1. At a lovely Sunday picnic you impress your partner by discussing the core
concept of risk versus return. You explain that when investments are
diversified across different asset classes the overall risk profile of the portfolio
is improved. You continue by explaining that there are numerous types of
risk. Which of the following are examples of unsystematic risk?
(1) Financial risk (due to the company’s excess leverage)
(2) Loss of market share
(3) Interest rate risk
(4) Business-cycle risk
a. 1 and 2
b. 2 and 3
c. 1 and 4
d. 2 and 4
1. What is the yield to maturity of a 10,000 6.5% bond that matures in 15 years if
it is currently priced at $9,650?
1. Brett purchased 1000 shares of stock in Electrode Semiconductor Corp for $7.50 on
January 1st. He received $0.375 per share in dividends on March 31st and on October 30th.
On December 30th he sells 1000 shares for $7.35. What is his one-year holding period
rate of return?
1. Beta is a measure of:
a. Total market risk
b. Systematic risk, non-diversifiable risk
c. Nonsystematic risk, diversifiable risk
d. Systematic risk, diversifiable risk
e. Nonsystematic risk, non-diversifiable risk
1. Which of the following is a money market security?
a. Intermediate-term bond mutual fund
c. Oil and Gas partnership
d. Bank-issued 9-month certificate of deposit
1. What is the internal rate of return for the following investment: $10,000
invested at the beginning of the first year (now); $6,000 invested at the end of
the first year; and $22,000 withdrawn at the end of the fourth year?
1. You are told that you will need to accumulate $1,400,000 by day one of
retirement in order to achieve your desired standard of living. How much will
you need to contribute at the end of each year to accumulate that sum given
the following information: 25 years until retirement, current investment
portfolio is worth $75,000, and the portfolio return-rate assumption is 8.5%?
1. Your parents intend to celebrate their 45th wedding anniversary by taking a
month-long trip to Africa. That trip will occur in seven years. They estimate
that the cost will be $38,000. How much will they need to save at the
beginning of each year (i.e., seven contributions) in order to accumulate the
needed funds if the assets will earn a 6.8% rate of return?
1. What is the expected arithmetic return of a security based on the following
Return 5 years ago = 17.0%
Return 4 years ago = 9.2%
Return 3 years ago = -2.2%
Return 2 years ago = -12.2%
Return last year = 32.0%
1. Which of the following situations is an example of a primary market
a. You purchase 100 shares of stock from another investor via the NASDAQ
b. A portfolio manager with the Peak Advisory Group purchases 10,000 shares of
stock. The broker-dealer purchases the shares by placing the buy order through
an electronic trading platform which matches to another investment-advisor
c. An individual investor purchases 2,000 ADR shares.
d. Your firm issues 5,000,000 shares in an initial public offering.
1. You are considering the purchase of a corporate bond making semi-annual coupon
payments. What will the market price be for a $10,000, 6% bond that matures in 10 years
and pays semi-annually if the yield to maturity on bonds of similar risk and maturity is
1. Showing what you’ve learned in this course, you are explaining to a friend that
diversification within the portfolio is prudent. Adding which two of the following assets
to his S&P500 portfolio would offer the most diversification benefit?
(1) Asset 1 with a correlation of +1
(2) Asset 2 with a correlation of +.5
(3) Asset 3 with a correlation of 0
(4) Asset 4 with a correlation of -.3
a. 2 and 3
b. 1 and 2
c. 3 and 4
d. 2 and 4
1. You want to purchase a Toyota Prius in one year; the projected price of the
vehicle is $26,500. If you put down $2,500 and finance the balance over five
years at a dealer financing rate of 1.2% (i.e., annual percentage rate) what will
be your monthly amortized loan payment? (Assume that the monthly payments
are made at the end of the period.)
1. You are seeking an investment with the best risk/return profile. Using the coefficient of
variance, which security will be selected?
a. Stock A (expected return 8.4% and standard deviation 13.8%)
b. Stock B (expected return 17.9% and standard deviation 43.4%)
c. Stock C (expected return 13.4% and standard deviation 22.3%)
d. Stock D (expected return 14.1% and standard deviation 21.3%)
1. What is the PallMall Corp’s weighted average cost of capital if its cost of pre-tax debt is
11% (25% of overall capital structure), its cost of preferred stock is 9.5% (15% of capital
structure) and its cost of equity is 15.5% (60% of the capital structure)? The marginal tax
rate is 35%.
1. Mandalay Flooring Company has $500,000 in Cash, $950,000 in Accounts Receivable,
$3,580,000 in Current Assets, $4,200,000 in Long-term Assets, $800,000 in Accounts
Payable, $1,100,000 in Current Liabilities, and $4,500,000 in Shareholder Equity. How
much long-term debt does the Mandalay Bay Flooring Company have?
a. Not enough information is given
1. What is the value of a share of preferred stock paying $1.20 and the required rate of
return is 8.5%?
1. Your firm wants to expand, but is concerned about the cost and return. Consequently, it
conducts an R&D project that costs $1.5 MM. The study determines that it will cost $6.0
MM to get the project up and running. In addition, you purchased land next door (which
will be used for the project) 5 years ago for $4.0 MM, but due to the weak realty market
it is currently valued at $2.0 MM. Given the following expected cash inflows (you
calculate the NINV) and a discount rate of 11%, what is the project’s NPV?
a. $8.71 MM
b. $7.21 MM
c. $6.71 MM
d. $10.71 MM
1. You are considering a capital acquisition; however, you are nervous about the
purchase. You plan on using an NPV analysis, so what might you do to account
for risky future cash flows?
(1) Require a higher risk-adjusted rate of return in the analysis
(2) Require a lower hurdle rate
(3) Project more conservative future cash flows
(4) Assume a higher earnings growth rate
a. 2 and 3 only
b. 2 and 4 only
c. 1 and 2 only
d. 1 and 3 only
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