Quiz 2 Chapters 5 and 6

20 Fin Questions

Chapter 5

1) Suppose a corporation can change its depreciation method so that its tax payments will decrease by $5,000 this year but increase by $5,000 next year.

A) The change will have no impact on the value of the company because its cash flow over time will be the same.

B) The change will decrease the value of the company because investors don’t like changes in accounting methods.

C) The change will decrease the value of the company because lower tax payments this year result from lower reported income.

D) The change will increase the value of the company because the value of the cash savings this year exceeds the cost of the cash payments next year.

2) Assuming two investments have equal lives, a high discount rate tends to favor

A) the investment with even cash flow.

B) the investment with large cash flow late.

C) the investment with large cash flow early.

D) neither investment since they have equal lives.

3) Biff deposited $9,000 in a bank account, and 10 years later he closes out the account, which is worth $18,000. What annual rate of interest has he earned over the 10 years?

A) 6.45%

B) 8.00%

C) 10.00%

D) 7.180%

4) How much money do I need to place into a bank account that pays a 1.08% rate in order to have $500 at the end of 7 years?

A) $332.54

B) $751.81

C) $463.78

D) $629.51

5) Auto Loans R Them loans you $24,000 for four years to buy a car. The loan must be repaid in 48 equal monthly payments. The annual interest rate on the loan is 9 percent. What is the monthly payment?

A) $597.24

B) $543.79

C) $563.82

D) $500.55

6) You have contracted to buy a house for $250,000, paying $30,000 down and taking out a fully amortizing loan for the balance, at a 5.7% annual rate for 30 years. What will your monthly payment be if they make equal monthly installments over the next 30 years (to the nearest dollar)?

A) $1,035

B) $1,277

C) $1,189

D) $1,123

7) If Cindy deposits $12,000 into a bank account that pays 6% interest compounded semiannually, what will the account balance be in seven years?

A) 18,151

B) 14,356

C) 16,987

D) 15,555

Chapter 6

8) Stock A has the following returns for various states of the economy:

State of

the Economy Probability Stock A’s Return

Recession 10% -30%

Below Average 20% -2%

Average 40% 10%

Above Average 20% 18%

Boom 10% 40%

Stock A’s expected return is

A) 5.4%.

B) 7.2%.

C) 8.2%.

D) 9.6%

9) You are considering a sales job that pays you on a commission basis or a salaried position that pays you $50,000 per year. Historical data suggests the following probability distribution for your commission income. Which job has the higher expected income?

Probability of

Commission Occurrence

$15,000 .15

$35,000 .20

$48,000 .35

$67,000 .22

$80,000 .18

A) The salary of $50,000 is greater than the expected commission of $49,630.

B) The salary of $50,000 is greater than the expected commission of $48,400.

C) The salary of $50,000 is less than the expected commission of $50,050.

D) The salary of $50,000 is less than the expected commission of $52,720.

10) Stock W has an expected return of 12% with a standard deviation of 8%. If returns are normally distributed, then approximately two-thirds of the time the return on stock W will be

A) between 12% and 20%.

B) between 8% and 12%.

C) between -4% and 28%.

D) between 4% and 20%.

11) Which of the following investments is clearly preferred to the others for an investor who is not holding a well-diversified portfolio?

Investment

A 18% 20%

B 20% 20%

C 20% 22%

A) Investment A

B) Investment B

C) Investment C

D) Cannot be determined without information regarding the risk-free rate of return.

12) Assume that you have $330,000 invested in a stock that is returning 11.50%, $170,000 invested in a stock that is returning 22.75%, and $470,000 invested in a stock that is returning 10.25%. What is the expected return of your portfolio?

A) 15.6%

B) 14.9%

C) 18.3%

D) 12.9%

13) Assume that you have $100,000 invested in a stock that is returning 14%, $150,000 invested in a stock that is returning 18%, and $200,000 invested in a stock that is returning 15%. What is the expected return of your portfolio?

A) 15.78%

B) 14.97%

C) 15.67%

D) 12.24%

14) Investment A has an expected return of 15% per year, while investment B has an expected return of 12% per year. A rational investor will choose

A) investment A because of the higher expected return.

B) investment B because a lower return means lower risk.

C) investment A if A and B are of equal risk.

D) investment A only if the standard deviation of returns for A is higher than the standard deviation of returns for B.

15) Investment A has an expected return of 14% with a standard deviation of 4%, while investment B has an expected return of 20% with a standard deviation of 9%. Therefore

A) a risk averse investor will definitely select investment A because the standard deviation is lower.

B) a rational investor will pick investment B because the return adjusted for risk (20% – 9%) is higher than the return adjusted for risk for investment A ($14% – 4%).

C) it is irrational for a risk-averse investor to select investment B because its standard deviation is more than twice as big as investment A’s, but the return is not twice as big.

D) rational investors could pick either A or B, depending on their level of risk aversion.

16) The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the

A) stock’s beta.

B) investor’s risk premium.

C) risk-free rate.

D) investor’s required rate of return.

17) Which of the following statements is MOST correct concerning diversification and risk?

A) Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.

B) Risk-averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk.

C) Only wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks to gain the benefits of diversification.

D) Proper diversification generally results in the elimination of risk.

18) Most stocks have betas between

A) -1.00 and 1.00.

B) 0.00 and 1.00.

C) 0.60 and 1.60.

D) 1.00 and 2.00.

19) Which of the following measures the average relationship between a stock’s returns and the market’s returns?

A) beta coefficient

B) standard deviation

C) geometric regression

D) coefficient of validation

20) An investor currently holds the following portfolio:

Amount

Invested

4,000 shares of Stock H $8,000 Beta = 1.3

7,500 shares of Stock I $24,000 Beta = 1.8

12,500 shares of Stock J $48,000 Beta = 2.2

The beta for the portfolio is

A) 1.77.

B) 1.99.

C) 1.88.

D) 1.45.