1) Which of the following statements is true?
a) The Principle of Diversification states that investors are better off by investing in two or three good assets even within the same industry.
b) The Principle of Diversification states that investors are better off by investing in different types of assets.
c) The Principle of Diversification states that investors are better off by investing in risk-free assets.
d) The Principle of Diversification states that investors are better off by investing in an industry of their choice.
2) Which of the following investments is more likely to give you a diversified common stock portfolio?
a) An index fund investing in stocks in the S&P 500 and in a money market fund.
b) Any stock mutual fund investing in a variety of industries in the United States.
c) A mutual fund investing in European and Asian stocks.
d) An international mutual fund investing in a wide variety of stocks within and outside one’s country.
3) Which of the following assets would pay a dividend?
a) U.S. Treasury security
b) Municipal bond
c) Share of preferred stock
d) Corporate bond
4) The market price of a bond in today’s dollars is the future value of its promised future coupon and principal payments. True or False
5) The dot-com bubble reminds us about what?
a) Capital markets are probably never efficient.
b) Capital markets are always inefficient.
c) Capital markets are not always efficient.
d) All of these
6) A stock with a beta less than 1.0 will rise or fall more than the market. True or False (it would be less risky and volatile than the rest of the market)
7) Which of the following statements is false?
a) Treasury bills (T-bills) have an original maturity of one year or less when they are issued.
b) Treasury notes and bonds have an original maturity of one year or more.
c) Negotiable CDs are time deposits issued by domestic or foreign commercial banks that can be sold to a third party.
d) Munis are long-term securities, issued by state and local governments, and are exempt from federal taxation.
8) The weighted average cost of capital (WACC) can be computed using the formula: WACC = (1 – L)re + L(1 – T)rd. Which (if any) of the following statements is true?
a) L is equity divided by firm value.
b) T is the personal tax rate.
c) re is the required return on debt.
d) None of these
9) Net present value (NPV) is the difference between:
a) What a capital budgeting project produces and what it is worth (its market value)
b) What a capital budgeting project costs and what it is worth (its market value)
c) What a capital budgeting project produces and what it is pays
d) Cash flows before taxes and cash flows after taxes
10) The NPV for a project equals the present value of the future cash flows divided by the initial investment. True or False
11) Firms that use debt financing .
a) Can always claim the interest deductions.
b) Must generate sufficient income from operations to claim the deduction.
c) Must have high operating leverage.
d) All of these
12) The use of debt in the firm’s capital structure is called:
a) Homemade leverage.
b) Operating leverage.
c) Financial leverage.
d) Decreasing leverage.
13) A firm’s capital structure policy is an established guide for the firm to determine the amount of money it will pay out as dividends. True or False (dividends policy)
14) Because zero-coupon bonds make only a single payment at maturity, they are the deepest-discount bonds possible. True or False
15) Which of the below is an example of one acting on the Principle of Market Efficiency.
a) You are going through Wal-Mart and the sacker tells you about a “hot” Brazilian fund. You call up your broker and order 100 shares.
b) Your sister-in-law is visiting. She tells you that her boss told her to invest in IBM. You go out and buy 100 shares of IBM.
c) You are at a barbeque and an acquaintance tells you they just read in The Wall Street Journal that Acme, Inc. has increased its dividend. Two days later you buy 100 shares of Acme.
d) Whenever you hear a “hot” tip, you assume it is too late for you to expect to make a profit.
16) A yield curve or term structure of interest rates is: _________
a) Upward sloping if yields increase with maturity.
b) Downward sloping if yields decrease with maturity
c) Upward sloping if yields decrease with maturity
d) Both a & b are correct
17) If the yield to maturity for a bond is less than the bond’s coupon rate, then the market value of the bond is: _______
a) Greater than the par value.
b) Less than the par value.
c) Equal to the par value.
d) Cannot tell
18) Your father gave you a gift of $20,000 for good behavior and you wanted to invest in the stock market. How much will your investment grow in five years, assuming that you earned 8% each and every year?
19) How much is eight $2000 payments worth to us today discounted at 7%?
20) What is the present value of $50,000 discounted at 15% for 10 years?
21) If I made seven, $1000 payments into a 401(k) account, how much would my account be worth after 20 years if I made 13% a year during that investment?
22) What is the value of a $100 investment that earned 6% per year for five years?
23) What is $1 million discounted at 10% for four years worth to us today?
24) You won the lottery and paid you $100,000 per year for the next 10 years. Assuming that you placed your winnings in an investment account, how much would that amount grow if you earned 6% during that time period?
25) What is the present value of $500 discounted at 5% for five years?