13) Rollins Corp’s total assets at the end of last year were $300,000 and its EBIT was $75,000. What was its basic earning power (BEP)? (10p) a. 20.00% b. 22.50% c. 25.00%

14) Raleigh Corp’s total common equity at the end of last year was $300,000 and its net income after taxes was $55,000. What was its ROE? (10p) a. 18.33% b. 18.67% c. 19.00%

Chapter # 5

15) You are interested in investing your money in a bank account. Which of the following banks provides you with the highest effective rate of interest? (5p)

a. Bank 3; 8.0% with quarterly compounding. b. Bank 4; 8.0% with daily (365-day) compounding. c. Bank 5; 8.2% with annual compounding.

16) Suppose you have $2,000 and plan to purchase a 3-year certificate of deposit (CD) that pays 4% interest, compounded annually. How much will you have when the CD matures? (10p)

a. $2,324.89 b. $2,591.45 c. $2,249.73

17) How much would $10,000 due in 100 years be worth today if the discount rate were 10%? (10p)

a. $0.73 b. $1.21 c. $2.49

18) At a rate of 8%, what is the present value of the following cash flow stream? $0 at Time 0; $100 at the end of Year 1; $300 at the end of Year 2; $0 at the end of Year 3; and $500 at the end of Year 4? (10p)

a. $717.31 b. $625.54 c. $788.32

19) You have a chance to buy an annuity that pays $1,000 at the end of each year for 5 years. You could earn 6% on your money in other investments with equal risk. What is the most you should pay for the annuity? (10p)

a. $3,324.89 b. $2,591.45 c. $4,212.36

Chapter # 6

20) The real risk-free rate is 3%, inflation is expected to be 2% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, what is the equilibrium rate of return on a 1-year Treasury bond? (10p)

a. 4.90% b. 5.00% c. 5.30%

21) For at least the next 10 years, the real risk-free rate of interest, r*, is expected to remain at 3%, inflation is expected to steadily increase steadily, and the maturity risk premium is expected to be 0.1(t – 1)%, where t is the number of years until the bond matures. Given this information, which of the following statements is correct? (5p)

a. The yield on 5-year corporate bonds must exceed the yield on 8-year Treasury bonds. b. The yield curve must be “humped.” c. The yield curve must be upward sloping.

22) Your uncle would like to limit both his interest rate price risk (the risk that rising rates will cause the value of his bonds to decline) and his default risk, but he would still like to invest in corporate bonds. He is considering the following bonds. Which of these bonds would best meet his criteria? (5p)

a. BBB bonds with 10 years to maturity. b. AAA bonds with 5 years to maturity. c. BBB bonds with 5 years to maturity.

23) Suppose 1-year T-bills currently yield 5.00% and the future inflation rate is expected to be constant at 3.10% per year. What is the real risk-free rate of return, r*? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. (10p)

a. 1.90% b. 2.00% c. 2.10%

24) Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.25%, and a maturity premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. (10p)

a. 6.05% b. 6.15% c. 6.25%

Chapter 7

25) Highfield Inc’s bonds currently sell for $1,275 and have a par value of $1,000. They pay a $120 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,120. What is their yield to call (YTC)? (10p)

a. 7.13% b. 7.28% c. 7.31%

26) Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? (5p)

a. Market interest rates decline sharply. b. The company’s bonds are downgraded. c. Market interest rates rise sharply.

27) Which of the following would be most likely to increase the coupon rate that is required to enable a bond to be issued at par? (5p)

a. Adding a call provision. b. Adding additional restrictive covenants that limit management’s actions. c. Adding a sinking fund.

28) The Carter Company’s bonds mature in 10 years have a par value of $1,000 and an annual coupon payment of $80. The market interest rate for the bonds is 9%. What is the price of these bonds? (10p)

a. $935.82 b. $941.51 c. $958.15

Chapter 8

29) An investor has a 2-stock portfolio with $50,000 invested in Palmer Manufacturing and $50,000 in Nickles Corporation. Palmer’s beta is 1.20 and Nickles’ beta is 1.00. What is the portfolio’s beta? (10p)

a. 0.94 b. 1.02 c. 1.10

30) The risk-free rate, rRF, is 6%. The overall stock market has an expected return of 12%. Hazlett, Inc. has a beta of 1.2. What is the required return of Hazlett, Inc. stock? (10p)

a. 12.8% b. 13.2% c. 13.5%

31) Given the following information, determine which beta coefficient for Stock A is consistent with equilibrium: (10p)

= 11.3%; rRF = 5%; RPM = 5%

a. 1.26 b. 1.10 c. 0.80

32) Magee Company’s stock has a beta of 1.20, the risk-free rate is 4.50%, and the market risk premium is 5.00%. What is Magee’s required return? (10p)

a. 10.25% b. 10.50% c. 10.75%

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